contents...every year we conduct a formal de-briefing of the orientation session so as to capture...

2012 Annual Report Contents 2

About Us ...............................................................................................................3

Message from the Chair ...................................................................................4

Message from the Acting CEO .......................................................................5

Corporate Highlights..........................................................................................6

Financial Highlights at a Glance ......................................................................9

Corporate Governance Report ...................................................................... 11

Management Discussion & Analysis ........................................................... 15

Overview ............................................................................................... 16

Financial Performance Review .......................................................... 18

Business Line Results .........................................................................24

Risk Management ...............................................................................25

Capital Management .......................................................................... 31

Outlook for 2013 ..................................................................................32

Consolidated Financial Statements .............................................................33

Index to the Consolidated Financial Statements ............................33

Independent Auditor’s Report ...........................................................34

Consolidated Balance Sheet .............................................................35

Consolidated Statement of Comprehensive Income ...................36

Consolidated Statement of Changes in Equity ..............................37

Consolidated Statement of Cash Flows ..........................................38

Notes to the Consolidated Financial Statements ...........................39

The Meridian Team ..........................................................................................89

Meridian Locations ...........................................................................................90

Contents

2012 Annual Report About Us 3

Meridian, Ontario’s largest credit union with over 70 years of banking history, serves more than 262,000 Members through 61 branches, 2 satellite branches, 8 Commercial Business Centres and 2 corporate offices.

Owned by its Members and guided by cooperative principles, Meridian’s success is based on having our Members’ backs. We deliver superior, personalized service and are committed to working as a financial partner to help our Members achieve their financial goals.

Through our corporate social responsibility program, we support a broad range of initiatives and events that make the neighbourhoods in which we work and live strong, vibrant and prosperous. Our earnings are reinvested in our Members’ communities, through local decision-making on loans and mortgages and a commitment to working as a financial partner to help our Members’ lives grow.

Whether Members bank at one of our neighbourhood branches, online or by using their smartphone, Meridian’s Members have access to all the financial products and services they need to safely and productively grow their financial life or business.

For more information on Meridian, please visit meridiancu.ca or call 1-866-592-2226.

About Us

2012 Annual Report Corporate Highlights

Celebrating the International Year of the Cooperatives 2012 was named the International Year of the Cooperatives by the United Nations, recognizing the diversity of the cooperative movement that, in Canada, has provided invaluable products and services for more than 100 years. As a credit union built on cooperative values and principles, Meridian championed this historic year, encouraging our Members to support their local cooperatives.

Meridian launched a contest, Search for Ontario’s Next Great Cooperative, encouraging Ontario youth to learn about the cooperative business model. Students, aged 14 to 17, submitted videos to pitch their idea for Ontario’s next great cooperative and had the chance to win a $5,000 RESP from Meridian.

Krystal Tieu of Markham, ON, was the Grand Prize winner, submitting a video featuring her idea for a cooperative business that offers an innovative way to improve students’ eating habits while creating opportunities for local, organic farmers. As part of the Grand Prize, Meridian also sent Tieu to the Cooperatives Young Leaders Camp, a week-long summer camp that brings Ontario youth together to learn about and practice communications and leadership through cooperative activities.

Sharing Our Knowledge In July 2012, Sean Jackson, Meridian President and CEO, and Don Ariss, Meridian Board Chair, were invited to speak at the 2012 World Credit Union conference in Gdansk, Poland. The pair shared their expertise and insights in a panel discussion entitled “Size Matters: Building a Business Case for Merging Credit Unions.” With Meridian’s track record of strong organic growth and two successful mergers, HEPCOE Credit Union and Niagara Credit Union in 2005 and the amalgamation with Desjardins Credit Union in 2011, Jackson and Ariss shared their lessons learned from our experiences. Credit union leaders from more than 60 countries came together to attend this premier, four day global credit union conference.

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2012 Annual Report Corporate Governance Report

Board Mandate The Board of Directors protects and enhances Meridian’s assets and is responsible for ensuring Meridian has clear strategic direction. Its goal is to protect the best interests of Meridian’s Members and stakeholders. The Board is further responsible for overseeing management to ensure that Meridian’s operations are managed in a sound and prudent manner thereby assuring Members that all regulatory and statutory requirements are met. Every Director is responsible for exercising independent judgment with honesty and integrity.

Board Composition and Election In accordance with our Bylaws, Meridian’s Board is composed of 12 Directors, all of whom are independent Directors. The process for the election of Directors is comprehensive. Each year the Board reviews the skills, knowledge & experience of the Board in order to determine if any gaps exist to ensure the highest quality Board composition. The Nominating Committee is requested by the Board to seek to fill any identified gaps as they solicit candidates for nomination from Meridian’s Members. Prospective candidates receive an extensive package of information. The Deposit Insurance Corporation of Ontario (“DICO”) recently used this package as the basis for a sample Director Candidate Information Guide for release to the Ontario credit union system. All eligible candidates are placed in nomination. The Nominating Committee interviews all candidates and evaluates them against a set of criteria defined by the Board in advance. The Nominating Committee recommends to our Members those candidates which are considered best qualified to serve Meridian to fill the number of vacancies. Nominees who are not recommended are eligible to remain on the ballot for election. Our Members can vote for the election of Directors by casting a ballot electronically via the Internet or in person at any of our Branches. Meridian’s Directors are elected for three year terms and represent a broad range of skills, experiences and backgrounds.

Board Diversity Meridian’s Board views diversity broadly by considering not only the traditional views of gender, ethnicity, religion, etc, but as importantly diversity of thought, experience and backgrounds. The 12 Directors bring to the Board table the following backgrounds and qualifications:

Bachelor of Commerce; Two Chartered Accountants; BSc (Business Management & Economics); MSc (Masters in Management Operations); Extensive Governance experience with more than 40 years in the credit union sector; Bachelor of Law; Certified Independent Director Designation; Honours BA (Economics Major); BA Economics; CMA; MA in Leadership; MBA; Bachelor of Science; MSc (Mathematics and Computer Science); Professional Engineer; Certified Human Resources Professional; Various entrepreneurial endeavours; Large Corporate Business environments and considerable work experience within the cooperative sector.

Meridian’s Board of Directors continues to be committed to the highest standards of Corporate Governance in order to demonstrate our stewardship to Members, employees and the communities we serve.

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Corporate Governance Report

2012 Annual Report Corporate Governance Report

Board Committees The Board has delegated the oversight for monitoring adherence to its policies to five Committees with the following primary accountabilities:

Audit Committee:• Reviewoffinancialstatements,internalcontrols,accountingpoliciesandreportingprocedures;

• Ensuringintegrityoffinancialreporting;

• Oversightofinternalandexternalauditprocesses;and

• Overseeingmanagementofsignificantoperationalriskandenterprise-widerisk.

Governance Committee:• MaintainingahealthygovernancecultureandoverseeingallGovernancepolicies;

• AssessingtheeffectivenessoftheBoard,itsCommitteesandCommitteeChairs;and

• OversightoftheBoard’sannualplanningprocess.

Nominating Committee:• Oversightofthenomination,assessmentandrecommendationofcandidatesfortheBoard;

• Assessmentoftheadequacyofthecandidatepooltoensureitfulfillsanyidentifiedgaps;

• OverseeingtheDirectorelectionprocess;

• Accountableforthegeneralcontent,objectivesandguidelinesofMeridian’sannualreport;and

• OversightoftheactivitiesassociatedwiththeAnnualGeneralMeetingandanySpecialMembers’Meetings.

Credit & Investment Committee:• Ensuringpolicyoversightofcredit, investmentandasset/liability risks foracceptable levelsandcompliance

with regulations; and

• Reviewingandapprovingindividualconnectedandrestrictedpartycreditapplications.

Human Resources Committee:• OverseeingtheHRpoliciesandprograms,ensuringthattheyaredeveloped,implementedandadheredtoby

management in support of the business strategies of the Credit Union;

• ReviewingandrecommendingDirectorcompensation;

• AdministeringtheprocessforreviewingtheCEO’sperformanceandcompensation;and

• Oversightoftheemployeepensionplans.

Orientation and Continuing Education New Directors are provided a comprehensive orientation to familiarize them with Meridian’s business operations and Governance processes. Every year we conduct a formal de-briefing of the orientation session so as to capture enhancement opportunities for subsequent years. The Governance Committee continues to evaluate this program to ensure the most effective orientation is provided to new Directors. Individual Committees have also established their own orientation programs to better educate new Committee members in their responsibilities. The Board has an approved budget for ongoing Director training and development, including educational sessions for the Board as a whole, industry-sponsored seminars and other conferences for individual Directors that are relevant to Meridian’s business. During 2012 several information/educational sessions were arranged for Board members as part of our Board meeting cycle. Examples were: Board Diversity; Asking the right questions; Basel III conducted by external auditors; Online Banking demonstration; Advertising Effectiveness study results; Member and Market Segmentation Strategy; and Distribution Model Alternatives. Increased focus in the area of up-skilling Directors’ competencies continued through 2012.

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2012 Annual Report Management’s Discussion & Analysis

This management discussion and analysis (“MD&A”) is provided to assist readers with interpreting Meridian‟s results of operations and financial condition for the fiscal year 2012, as compared to prior years. The MD&A should be read in conjunction with the audited financial statements, which have been prepared in accordance with International Financial Reporting Standards (“IFRS”). Unless otherwise indicated all amounts in the MD&A are expressed in Canadian dollars.

Caution Regarding Forward-Looking Statements This MD&A includes forward-looking statements which by their very nature require management to make assumptions and involve inherent risks and uncertainties. Forward-looking statements are typically identified by the words “believe”, “expect”, “anticipate”, “intend”, “estimate”, “may increase”, “may impact”, and other similar expressions, or future or conditional verbs such as “will”, “should”, “would” and “could”. A number of important factors, many of which are beyond management‟s control, could cause actual future results, conditions, actions or events to differ materially from the targets, projections, expectations, estimates or intentions expressed in forward-looking statements. These factors include, but are not limited to, changes in general economic conditions in Canada, particularly those in Ontario; legislative or regulatory developments; changes in accounting standards or policies; and Meridian‟s success in anticipating and managing the risks inherent in these factors. Readers are cautioned that the foregoing list is not exhaustive. Undue reliance should not be placed on forward-looking statements as actual results may differ materially from expectations. Meridian does not undertake to update any forward-looking statements contained in this annual report.

Overview ............................................................. 16

Mission, Vision & Values ..................................... 16

2012 Financial Overview .................................... 16

Financial Performance Review ................................ 18

Total Revenue .................................................. 18

Net Interest Income .......................................... 18

Provision for Credit Losses ................................. 20

Credit Portfolio Quality ...................................... 20

Non-Interest Income from Operating Activities ......................................................... 21

Non-Interest Income from Investments in Associates and Joint Ventures ............................. 22

Non-Interest Expenses ...................................... 22

Dividends ....................................................... 23

Balance Sheet Strength ..................................... 23

Business Line Results ............................................ 24

Retail Banking & Investment Services .................. 24

Commercial Banking ......................................... 24

Risk Management ................................................. 25

Risk Management Philosophy.............................. 25

Risk Management Framework ............................. 25

Risk Governance ............................................... 27

Management Committees .................................. 28

IdentificationandManagementofKeyRisks ......... 29

Capital Management ............................................. 31

Capital Management Philosophy .......................... 31

Capital Management Framework ......................... 31

Capital Management Governance ........................ 31

Managing and Monitoring Capital ........................ 31

Outlook for 2013 .................................................. 32

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Management’s Discussion & Analysis


The table that follows summarizes the year-over-year changes in our net interest income, product portfolio mix and yields. It reflects the following trends:

• Stable cash and cash equivalents, a result of successfully managing liquidity despite a competitive deposit market • Higher investment balance as a result of a higher liquidity reserve deposit due to asset growth coupled with short-term

investments held at the beginning of the year which were deployed throughout 2012 to help fund lending growth • Significant reduction in the interest income earned on all lending products - a continuing function of the competitive

landscape and flat yield curve • Sizeable growth in Commercial demand deposits, due to ongoing focus on new deposit account acquisition • A stabilized Member preference between demand and term deposits • An increase in borrowings, primarily a result of higher securitization activity generated to support funding needs

($ millions)

A

x R

Av

x R

Cash and cash equivalents 231.6 1.1 2.8% 0.5% 257.6 1.4 3.8% 0.5%

Investments 748.5 14.1 9.1% 1.9% 557.4 9.3 8.1% 1.7%

Loans 1,842.1 99.0 22.5% 5.4% 1,665.5 90.9 24.3% 5.5%

Lines of credit 1,224.1 49.5 14.9% 4.0% 1,117.7 47.3 16.3% 4.2%

Mortgages 4,041.4 143.2 49.3% 3.5% 3,189.9 125.6 46.4% 3.9%

Other 103.2 - 1.3% 0.0% 79.3 - 1.2% 0.0%

Total assets 8,190.9 306.9 100.0% 3.7% 6,867.4 274.6 100.0% 4.0%

Demands 2,938.4 23.3 35.9% 0.8% 2,480.5 20.1 36.1% 0.8%

Fixed terms 3,782.2 93.4 46.2% 2.5% 3,217.5 86.4 46.9% 2.7%

Borrowings 786.6 16.4 9.6% 2.1% 561.3 14.1 8.2% 2.5%

Other 161.4 - 2.0% 0.0% 140.1 - 2.0% 0.0%

Total liabilities 7,668.6 133.1 93.6% 1.7% 6,399.4 120.6 93.2% 1.9% Members‟ equity 522.3 - 6.4% 0.0% 468.0 - 6.8% 0.0%

Total liabilities and Members‟ equity 8,190.9 133.1 100.0% 1.6% 6,867.4 120.6 100.0% 1.8%

173.8 154.0 Interest income from operating activities, which excludes the net realized and unrealized gains and losses related to derivatives and market investments, ended the year at $180.2 million, an improvement of approximately $17.3 million or 10.6% over 2011.

The low interest rate environment that has persisted since 2010 continued throughout 2012. This effect was compounded by significant competition in the Canadian financial services sector for retail mortgages and deposits. These competing pressures resulted in lower overall lending yields without the benefit of equally reduced deposit yields. As a result, attracting deposits remained a significant challenge throughout 2012. Not only was there competition in the marketplace for deposit money, but the flat yield curve provided little incentive for Members to lock in their money. In the second half of the year, Meridian introduced a special-priced 18-month GIC offer to both source deposits and to encourage Members to lock in some of their demand funds. The success of this product campaign, combined with our 3-year Escalator deposit featuring market-leading rates allowed Meridian to hold the percentage of our deposit book invested in term deposits flat to 2011 as well as exceed our overall 2012 deposit plan.

Meridian continued to securitize residential mortgages throughout 2012 to help fund long-term growth as securitization remained an attractive funding tool by providing low cost and long-term funding, combined with the benefit of stable availability. Included in interest income from operating activities is $26.6 million of interest income on mortgages which had been securitized, an increase of $3.4 million from 2011. Also included in interest income from operating activities is $2.1 million generated through the pledge of Mortgage-backed securities (“MBS”) purchased from third parties in order to meet any reinvestment requirements that are not met through the use of MBS created from Meridian‟s own mortgage portfolio.

The interest expense associated with Meridian‟s securitization activities increased by $2.8 million or 19.7% from 2011 to $16.7 million, largely driven by increased borrowings partially offset by a decrease in interest rates. Although the mortgage securitization liability has grown by 48% year-over-year, Meridian believes that the continued use of mortgage securitization as a funding source is economically advantageous, and continues to weigh it against alternative funding sources to ensure funding is being done in a responsible manner.

Additionally, upon amalgamation with DCU in 2011, Meridian commenced servicing a portfolio of mortgages that had

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The Credit Union‟s credit risk policies, processes and methodologies have not changed materially from the prior year, except for the Commercial risk rating model, where the risk rating scale has been expanded from six to nine ratings, and from primarily two input measurements to a mix of twenty-two questions addressing various components of risk.

The Commercial credit risk rating model is premised on a comprehensive assessment of the borrower‟s risk of default, through measurement of industry, business, management and financial risk factors, along with the risk of loss given default based on an assessment of security composition and relative historical recovery experience. The model includes a standard set of questions and answers that align to an implied level of risk. Questions are given varied weightings and an overall borrower risk rating is derived from a cumulative weighting of the answers. The Commercial loan portfolio stratified by risk rating is reviewed monthly. Risk ratings range from “very low” to “impaired”. Most of the portfolio continues to fall into the “better than average” or “average” categories. Collectively, these two ratings account for approximately 84.6% of the total Commercial portfolio.

Over the past several years, the Commercial business has achieved significant growth in its loan portfolio. In an effort to ensure that Meridian proactively manages the credit risk inherent in this portfolio, the Credit Union has initiated a complete Commercial business transformation program with the objectives of enhancing portfolio credit management practices and improving Member experience through new automated processes and other techniques. This multi-year project will establish a target operating model for commercial lending and will establish expanded commercial lending portfolio analytics and reporting systems. It will result in processes and risk management practices appropriate for the ongoing growth in volume and complexity of Meridian‟s Commercial loan portfolio. Management‟s intention is to temper growth in this portfolio in the short term until the above transformation program initiatives are fully implemented.

t t com f m r t g Act v t Compared to 2011, non-interest income increased by $1.6 million or 4.5% to $37.7 million in 2012. The primary contributor was loan servicing fees which totalled $1.0 million more than 2011, reflecting the strong growth in Commercial lending. Foreign exchange revenue also rose by $0.4 million as Members took advantage of the strong Canadian dollar. Mutual fund revenue improved by $0.3 million despite the volatility in capital markets. Net sales of wealth products continued to grow as markets gained strength and Members required more advanced wealth solutions. Revenue from service fees rose by $0.3 million, largely representing growth in income from our Maximiser Convenience Plus product which provides unlimited monthly transactions in addition to a number of free cheque options. Insurance commissions declined $0.5 million attributable to lower Member demand for life insurance policies.

Non-interest income generated by new branches, excluding foreign exchange revenue, decreased from $1.8 million in 2011 to $1.5 million in 2012. Automatic banking machines (“ABM”) of new branches were incorporated into THE EXCHANGE® network in 2012. This is a surcharge free network of ABMs across Canada which Meridian participates in to provide more extensive ABM access to Members. Interac revenue generated by new branches declined by $0.2 million as transactions by cardholders from other financial institution participating in THE EXCHANGE® network switched from Interac to THE EXCHANGE® network.

The following table summarizes the composition of Meridian non-interest income.

N n n m

($ millions)

n m

v

%

Service fees 11.6 30.8% 0.1% 11.3 31.3% 0.2% Loan servicing fees 7.1 18.8% 0.1% 6.2 17.2% 0.1% Insurance commission 5.6 14.9% 0.1% 6.1 16.9% 0.1% Foreign exchange 4.0 10.6% 0.0% 3.6 10.0% 0.1% Mutual fund revenue 4.8 12.7% 0.1% 4.5 12.5% 0.1% Interac revenue 2.4 6.4% 0.0% 2.5 6.9% 0.0% Credit card revenue 0.9 2.4% 0.0% 0.8 2.2% 0.0% Other 1.3 3.4% 0.0% 1.1 3.0% 0.0% Total 37.7 100.0% 0.5% 36.1 100.0% 0.5%

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No t r t c m fr m v tm t A c t a t V t r Non-interest income from our investments in associates and joint ventures grew $5.4 million to $5.8 million in 2012. This significant increase reflects realized and unrealized gains in the market value of Meridian‟s share of third party asset-backed commercial paper (“ABCP”) held by the CUCO Cooperative Association. The CUCO Cooperative Association was created to hold the ABCP on behalf of Member credit unions, following the merger of Credit Union Central of Ontario and Credit Union Central of British Columbia to form Central 1 on July 1, 2008. In 2011, gains on the ABCP investment were contained due to capital market volatility emanating from the Eurozone debt crisis.

N t t x Non-interest expenses were $154.9 million in 2012, an increase of $9.8 million or 6.7% from the prior year. A key contributor to this increase is the full-year impact of new branch operation expenses, as only seven months of operating expenses were incurred for these branches in 2011. Direct expenses related to new branch operations, excluding corporate expenses, rose by $3.2 million or 41.3% to $11.1 million, reflecting higher personnel and occupancy costs.

Non-interest expenses ($ millions)

v

x

Salaries and employee benefits

Salaries 63.1 40.7% 0.8% 55.8 38.4% 0.8%

Benefits 12.3 7.9% 0.1% 16.2 11.2% 0.2%

Variable incentive compensation 9.4 6.1% 0.1% 10.5 7.2% 0.2%

Occupancy 12.4 8.0% 0.2% 11.5 7.9% 0.2%

Transaction services 9.9 6.4% 0.1% 8.6 5.9% 0.1%

Deposit insurance 5.2 3.4% 0.1% 4.3 3.0% 0.1%

Software and hardware 4.4 2.8% 0.1% 3.9 2.7% 0.1%

Depreciation of property, plant and equipment

5.3 3.4% 0.1% 5.3 3.7% 0.1%

Amortization of intangible assets 5.7 3.7% 0.1% 4.7 3.2% 0.1%

Marketing 6.0 3.9% 0.1% 4.7 3.2% 0.1%

Human resources 2.3 1.5% 0.0% 2.0 1.4% 0.0%

Enterprise initiatives 2.6 1.7% 0.0% 4.1 2.8% 0.1%

Other expenses 16.3 10.5% 0.2% 13.6 9.4% 0.2%

Total 154.9 100.0% 1.9% 145.2 100.0% 2.1%

Overall, personnel expenses grew by $2.1 million or 2.6% to $84.8 million. The additional expense is attributable to the temporary incremental staff required to complete the DCU integration and the permanent incremental staff needed to support our growing business and delivery of services to our expanded Member base. Key areas of employee growth included new branches, wealth management, lending operations and mortgage broker support. Variable incentive compensation decreased by $1.1 million or 10.5%, reflecting lower earnings results. Employee benefits declined by $3.9 million or 24.1% due a curtailment gain in the legacy DCU defined benefit pension plan, along with lower severance expenses.

One of Meridian‟s strategic focuses is to improve brand awareness. In support of this objective, marketing expenses grew by $1.3 million or 27.6%, associated with radio, television, print and online advertising, community events and implementation of tools to help better understand Meridian‟s Members and market. Occupancy costs for branches and offices rose by $0.9 million or 7.8% reflecting the full-year‟s cost of operating new branches as well as real estate price inflation. The increase in other general operating expenses can be largely attributed to higher transactional costs such as ABM and cheque clearing expenses and the cost of Meridian‟s deposit insurance.

Every year Meridian makes strategic investments in enterprise initiatives to ensure we deliver up-to-date financial services to Members, meet regulatory compliance standards and implement new strategies. In 2012 the amount invested in such initiatives decreased by $1.5 million or 36.9% to $2.6 million. The decline was as a result of limited personnel capacity due to the focus on the integration.

As part of Meridian‟s amalgamation with DCU, the fair value of the DCU assets acquired and liabilities assumed was recorded in 2011. One of the material entries was the recording of core deposit intangibles (“CDI”) which represent the inherent

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million in lending and $163.0 million in deposits. Loan growth was most significant in the first half of the year due to momentum generated in 2011, with a number of deals in the pipeline at that time. The strong lending growth surpassed expectations and contributed to the increase in non-interest income by way of loan fees. During the second half of 2012, the Commercial banking team focused on growing Meridian‟s deposits. Deposit growth was mainly generated through competitively priced term deposits.

During 2012, Meridian completed the development of a three year Commercial banking strategy which includes a business banking transformation program. This program will improve Meridian‟s Commercial banking controls and compliance, in addition to our risk management practices. It is anticipated that this will help mitigate some of the significant loan losses as experienced in 2012. A centralized technology solution will be employed to support Commercial banking workflow and enhanced risk management. A people strategy will also be developed for the Commercial banking function, along with a career development path.

Risk Management The Credit Union‟s activities expose it to a number of risks in all aspects of operations. These risks are generally shared by all deposit taking Financial Institutions. In support of the achievement of sustainable growth, a balanced approach must be taken between strategic and operational objectives and the level of risk. This ensures that long-term performance is both sustainable and consistent.

a eme y The Credit Union‟s risk management philosophy is to anticipate risk in all its planning and decision making and to strive to be proactive and accountable in its actions and treatment of outcomes. Risk management is the responsibility of everyone at the Credit Union, including the Board of Directors, management and all employees. Critical to the attainment of the strategic objectives of the Credit Union, it is given a high priority.

This philosophy, combined with the knowledge and experience of the Credit Union‟s operating management and risk management teams, ensures that business strategies and activities are consistent with the Credit Union‟s risk appetite.

R k a m w k The risk management framework for Meridian has been developed to provide a basis for confidence among Members, creditors and regulatory agencies, that the Credit Union will manage risk on a prudent basis to achieve business objectives and no single event or combination of events will materially impact the Credit Union.

This framework involves a number of related policies, processes and programs which are performed and managed by various groups within the Credit Union. A critical component to all the elements of the framework is regular reporting to ensure efficient and effective monitoring and oversight.

The Credit Union has established an Enterprise Risk Management (“ERM”) program covering all operating areas that expose the Credit Union to material financial, operational, legal, regulatory or reputational risks. This program is based on The Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) ERM framework, a recognized enterprise risk management framework.

The goal of the ERM program is to ensure that all relevant and emerging risks are identified and that they are managed in a balanced manner. Under ERM, a broad based view of internal and external risks to the Credit Union is taken where risks are identified, assessed on the basis of impact and likelihood and prioritized with appropriate plans implemented to mitigate them to an acceptable level. Progress against these risk mitigation plans is monitored by management on a quarterly basis, with the results reported to the Audit Committee. Consideration is given to emerging risks as they develop, and action is taken as necessary.

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The o has overall responsibility for the establishment and oversight of Meridian‟s risk management framework. The Board has established the Audit Committee and charged them with the responsibility for, among other things, the development and monitoring of risk management policies. The Audit Committee reports regularly to the Board on its activities.

The h u v leads the Executive Leadership Team of the Credit Union in the setting of the long-term business strategy, the definition of risk appetite and integration of risk appetite into the business strategies and plans. The President and Chief Executive Officer is supported by five n in the overall management of risk for the Credit Union.

a m t tt e The n k , which comprises the Executive Leadership Team, Senior Leadership Team members of the Operating Committee and Risk Management, provides a forum for the strategic assessment of risks – identifying, reviewing and advising on current and emerging risk issues and associated mitigation plans.

The n y , which comprises the President and CEO, Chief Financial Officer, Chief Member Services Officer and senior leaders from Delivery and Credit Risk Management, reviews Meridian‟s overall loan portfolio key indicators and monitors performance against established credit policy. Key activities include:

review of key portfolio management indicators (sector/connected party limits, delinquency and impairment trends, and watchlist reports);

review new pipeline reporting relative to managing to established target commercial loan level; reviewing limit proposals and providing input from a business perspective; annual review of loan provisioning policy and review/monitoring of provisioning status and forecasts throughout the

year; approval of commercial deals from a „strategy‟ perspective; and review of macro-economic industry trends that could have systemic impact, positive or negative, upon all or portions of

the loan portfolio

The A y t , comprised of Finance, Delivery and Marketing Executive Leadership and Senior Leadership, provides strategic direction in the management of interest rate risk, foreign exchange risk, liquidity and funding risk, investment portfolio decisions and capital management. The Committee is also accountable for compliance with policies, guidelines and regulations relative to investments, derivatives and liquidity.

The i y , comprised of the Chief Information Officer, Chief Financial Officer, Chief Member Services Officer and IT Governance leaders, is accountable for the governance of Information Security and security of Member information, ensuring that Information Security Policies and activities are integrated and coordinated across all related business operations and providing awareness of Meridian‟s information risk profile and that information security risks are mitigated to an acceptable level in accordance with policy.

The n , comprised of the Chief of Staff, Chief Financial Officer and senior leaders from Finance, Risk Management and People Services, is responsible for all communications, investments, actuarial and funding and administration/operations related to Meridian's defined benefit pension plan (the “DB Plan”) and defined contribution pension/savings (RRSP) plan (the “DC Plan) (collectively the “Pension Plan”).

The is accountable for identifying new risks, monitoring existing risks on a continuous basis and providing related reporting, risk mitigation, obtaining and allocating resources for risk mitigation and implementing internal controls and mitigation supporting processes.

k v is responsible for the design and application of Meridian‟s risk management framework and provides independent oversight and governance with respect to risk identification, measurement, control, monitoring and reporting. Risk Management Services is independent of Meridian‟s Business Units and works collaboratively with Business Units to: (i) establish policies, procedures and limits that align with Meridian‟s Risk Appetite; (ii) identify, assess, mitigate and monitor the risks associated with business activities and strategies; and (iii) provide education and awareness relative to Meridian‟s risk management framework.

nt n v c provides independent assurance to the Board of Directors through the Audit Committee of the effectiveness of risk management, control and governance processes that are in place to manage the risks that are faced by Meridian.

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u Un will ensure that processes, procedures and controls that are in place to manage risk are being followed and enhanced where necessary and will implement supporting processes and internal controls identified through the risk mitigation process by the Senior Leadership Team.

e eme Ke The Credit Union has identified ten key risk classes to which specific risks are assigned. Accountability for each risk class and the related specific risks have been assigned through the Enterprise Risk Management Program. A discussion of each risk and how it is managed follows.

Credit Risk Credit risk is the risk of financial loss when a Member or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the loan portfolio. Meridian‟s lending philosophy is established by the Credit Risk Management Board policy. The Credit Risk Management Board Policy provides direction to management relative to:

Formulating operational credit policies covering eligible purposes of loans, collateral requirements, credit assessment, risk rating and reporting, documentary and legal procedures, and compliance with regulatory and statutory requirements;

Establishing a lending authority structure for the approval and renewal of credit facilities. Authorization limits are delegated to the Chief Executive Officer who further delegates such lending authority to senior management;

Reviewing and assessing specific and aggregate credit risk. The Credit department assesses and approves where applicable, all credit exposures in excess of delegated limits;

Limits in concentrations of exposure to counterparties; Compliance with agreed exposure limits. Regular reports are provided to the Credit and Investment Committee of the

Board on the credit quality of the portfolio.

A detailed discussion of the management of credit risk is provided in Note 31.1 of the audited consolidated financial statements.

Market Risk Market risk is the risk of loss resulting from changes in financial market factors, most commonly through interest rate changes. Interest rate risk is the sensitivity of the Credit Union‟s financial position to movements in interest rates. It arises from the fact that assets, liabilities and off-balance sheet instruments mature or re-price at various dates. As interest rates change, net interest income can be negatively impacted based on the distribution of these maturity and re-pricing dates. We assess our level of interest rate risk on a monthly basis through the use of a sophisticated income simulation model. Through this model, we run various scenarios based upon expected interest rate levels and we manage our risk tolerance levels based upon a 1% and 2% shock to those rates. The process and procedures surrounding this are governed by a defined policy which is approved by the Board of Directors annually. A detailed discussion of the management of market risk is provided in Note 31.2 of the audited consolidated financial statements.

Liquidity Risk Liquidity risk arises in the course of managing our assets and liabilities. It is the risk that the Credit Union is unable to meet its financial obligations in a timely manner and at reasonable prices. Liquidity levels, prescribed by the Credit Unions and Caisses Populaires Act, state that a class 2 credit union (a credit union with total assets greater than or equal to $50 million or a credit union which makes a commercial loan) shall establish and maintain prudent levels and forms of liquidity that are sufficient to meet its cash flow needs, including depositor withdrawals and other obligations as they come due. As a member of a liquidity pool, however, Meridian is compelled to maintain 6% of deposits in liquid investments. In order to maintain an appropriate level of conservatism our internal liquidity management philosophy is to keep our liquidity level between 7.75% and 15% of assets, and to ensure that we have both adequate capacity and diversity of external funding sources available. Meridian‟s external funding sources consist of credit and contingency credit facilities through Central 1, the CMB securitization program and access to wholesale broker funding. We update our funding requirement levels weekly based upon our forecasted growth rates and balance the use of these funding sources so as to ensure both funding diversification and adequate contingency lines. Within the available balance, early warning limits exist, which trigger required reporting and action plans from the Asset/Liability Management Committee and reporting through the Audit Committee and Board of Directors. A detailed discussion of the management of liquidity risk is provided in Note 31.3 of the audited consolidated financial statements.

Member Risk Member risk is the risk that Meridian cannot meet the expectations of its Members. This risk can arise if Meridian is not aware of changes in pervasive Member needs and/or wants and can lead to a decline in Member confidence regarding Meridian‟s ability to provide a superior or consistent level of service, a loss of Members or the inability to grow the business.

Meridian manages Member risk primarily through its “Promise to Members” which states that Meridian will stand out as a proactive, genuine partner to its Member. In support of this promise and the mitigation of Member risk are the establishment and continual enhancement of its sales and services capabilities, fulfilment and measurement strategies,

29


performance of a Member satisfaction survey and a Member Concerns program. These tactics ensure that the expectation of Members are identified, understood and addressed in a timely and effective manner.

Competition Risk Competition risk is the risk that Meridian is not able to build or maintain sustainable competitive advantage in a given market or markets. This risk can arise where changes in opportunities, threats and other conditions in the credit union/financial services industry, and the capabilities of competitors threaten the profitability or long-term viability.

Meridian manages competition risk by developing strategic plans through consideration of an external assessment which provides an analysis of competitors and the credit union system, evolving channel usage, economic outlook and industry growth expectations. This risk is closely linked to Member risk and so the same risk mitigation tactics apply to competition risk.

Strategic Risk Strategic risk is the risk that Meridian is not able to implement appropriate business plans and strategies, or to effectively allocate resources. In addition, this risk may also arise from the inability to adapt to changes in the business environment.

Meridian manages strategic risk through the performance of a comprehensive Enterprise Strategic Planning process which encompasses financial and strategic planning at a business unit and enterprise-wide level. This integrated financial and strategic planning process considers business unit strategies and key initiatives, and ensures alignment between business unit and enterprise strategies. Following the approval of the strategy by the Board of Directors, performance relative to the strategic plan is monitored and reported on, including the effectiveness and risks.

Regulatory and Legal Risk Regulatory and legal risk is the risk that business activities are impeded through non-compliance with regulatory requirements, legal obligations, internal policies and procedures or changes in the regulatory environment.

Meridian manages regulatory and legal risk through the promotion of a strong compliance culture and the integration of effective internal controls. Meridian‟s Code of Ethics outlines expectations for conduct of employees of the Credit Union. In support of the Code of Ethics, the Ethics 1st Program has been established to ensure appropriate and further guidance on honouring the Code of Ethics. Primary responsibility for compliance with all applicable regulatory requirements rests with the Senior Leadership Team and extends to all employees. Business units manage day-to-day regulatory and legal risk primarily through the implementation of appropriate policies, procedures and controls.

Reputation Risk Reputation risk is the risk that Meridian‟s reputation, brand or corporate image is not sufficient to enable it to achieve its vision, mission and goals. This risk may arise if unethical business practices damage Meridian‟s reputation and expose it to losses in Members, revenue and the ability to compete or if Members and the public do not recognize Meridian as a relationship-based financial services brand.

Meridian manages reputation risk primarily through its Code of Ethics which outlines expectations for conduct of employees of the Credit Union and continuous monitoring of the external media. Additionally, a Member satisfaction survey and the Member Concerns program provide management with the ability to identify issues or concerns which have or may lead to reputational impacts. While the Senior Leadership Team is responsible for ensuring that any reputational risk issues related to products and services, transactions, sales and services practices and new and existing business activities are considered, every employee and representative of the Credit Union is responsible for protecting the Credit Union‟s reputation.

Operational Risk Operational risk is the risk of loss resulting from inadequate or failed human performance, processes or technology. The Credit Union is exposed to a broad range of operational risks including talent acquisition, retention, performance and succession, technology/systems failures, fraud/theft/misappropriation of assets, business disruption, information/privacy/fiduciary breaches or failed transaction processing. The failure to manage operational risk can result in direct or indirect financial loss, reputational impact, regulatory censure & penalties or failure in the management of other risks.

Meridian manages operational risk through extensive policies, procedures and internal controls related to human resources, information technology development and change management and business operations. Complementing these policies, procedures and internal controls are centralized departments which focus on the enterprise-wide management of specific operational risks such as financial crime, business continuity/disaster recovery, privacy & confidentiality, vendor management, project management, and information security & information technology governance. These departments have developed specific programs, policies, standards and methodologies to support the management of operational risk.

Emerging Risk The Senior Leadership Team is accountable for identifying and reporting on risks that may develop over time. While these

30


risks may not be specifically actionable now, they require monitoring as they may impact the Credit Union‟s operations. Emerging risks are currently identified through the knowledge and experience of senior management. The Credit Union has developed a dashboard of key economic indicators that is used to help identify issues and trends which could lead to emerging risks.

Capital Management The Credit Union is committed to a disciplined approach to capital management and maintaining a strong capital base to support the risks associated with its business activities. Maintaining a strong capital position will contribute to safety for the Credit Union‟s Members, promotes confidence in attracting new Members to the Credit Union, maintains strong returns to the Credit Union‟s Class A Shareholders and allows the Credit Union to take advantage of growth opportunities.

ta a m t y The Credit Union‟s capital management philosophy is to remain adequately capitalized at all times and to maintain a prudent cushion of equity to ensure its on-going economic stability as well as finance new growth opportunities.

a a m w The principles and key elements of the Credit Union‟s capital management framework are outlined in the Board Capital Management Policy. This policy establishes and assigns the responsibilities related to capital and sets forth both general and specific policy guidelines related to capital management and the reporting mechanisms.

a a eme ve e The Board of Directors and its Audit Committee provide ultimate oversight and approval of capital management, including the capital management policy and annual capital plan. They regularly review the Credit Union‟s capital position and key capital management activities. The Asset/Liability Committee provides senior management oversight of the capital management process, including review and discussion of significant capital policies, issues and action items.

Ma a The Credit Union has a comprehensive risk management framework to ensure that the risks taken while conducting its business activities are consistent with its risk appetite. In managing the Credit Union‟s capital position, close attention is paid to the cost and availability of the types of capital, desired leverage, changes in both assets and risk weighted assets and the opportunities to profitably deploy capital.

Capital levels are monitored monthly based on our forecasted financial position, on both capital leverage and risk weighted basis. On both measures, current capital levels are well in excess of regulatory minimums. Our monitoring and forecasting procedures track the expected growth rate in risk weighted assets relative to earnings to determine if additional share capital is required. These projections also take full account of any future impact of changes in accounting standards. Meridian‟s capital quality also exceeds regulatory minimum requirements. Provincial regulations require that at least 50% of a credit union‟s capital base be comprised of primary or Tier 1 capital. As of year-end, 87.1% of Meridian‟s capital base consisted of Tier 1 capital. A detailed discussion of capital management is provided in Note 31.5 of the audited consolidated financial statements.

A combination of negative economic factors and new accounting standards on Meridian‟s defined benefit (“DB”) pension plans have contributed to a significant decrease in regulatory capital over the last few years. These factors include the dramatic decline in equity markets in 2008/09 and volatile market performance since that time. In addition, persistent low interest rates have caused the present value of the liabilities of the pension plans to rise. The net negative impact to Meridian‟s capital since 2010 is $14.5MM.

As the economy improves and rates rise in the coming years, this negative impact is expected to be slowly, but not fully, reversed.

At the end of 2012, a plan amendment was made to one of Meridian‟s DB pension plans and as a result, the active plan members became members of Meridian‟s defined contribution (“DC”) pension plan at the beginning of 2013. These members will not accrue benefit under the legacy DB plan for service subsequent to December 31, 2012. Under this arrangement, assets remain in the plan and are paid out when participants retire or terminate employment, but plan members‟ benefits do not grow with additional years of service or salary increases.

A similar plan amendment has been announced in regard to Meridian‟s other DB pension plan, with plan members receiving notification in January 2013 that they will also join the DC plan noted above. Their membership in the legacy DB plan will continue through to December 31, 2014 as part of the notice period. A significant majority of Meridian‟s employees are already members of the DC pension plan. The cessation of future benefit accrual under both DB plans will result in all

31


Meridian employees being part of the same DC pension plan, which harmonizes the pension benefit offering for all employees.

These plan amendments result in equitable treatment of all Meridian employees as it relates to the provision of pension benefits. In addition, this results in immediate cost savings as future benefit accruals are eliminated. The plan amendment in 2012 resulted in a curtailment gain of $2.9MM. Freezing the DB plans also significantly reduces the potential for future volatility in pension funding, pension expense and impacts to Meridian‟s capital position.

Outlook for 2013 Canada‟s near term economic prospects can be described as modest, but will benefit from improvements in US domestic demand and a generally buoyant commodities market in 2013. It is anticipated that economic activity will be driven mainly by business investment and growth in consumption. This is based on the fact that business profits have rebounded and financial conditions are expected to continue to be highly stimulative. The Bank of Canada projects that core inflation will gradually increase to 2% by the second half of 2014 and total inflation will remain around 1% in 2013 before gradually rising. This has prompted expectations that low interest rates will persist throughout 2013. Housing activity is expected to decline in 2013 as a result of the changes in mortgage regulations and rising total cost of ownership relative to income levels. Both home prices and the level of construction activity are anticipated to weaken. Canadian exports are projected to gradually increase but remain below their pre-recession levels due to weak foreign demand and the strength of the Canadian dollar. Given this economic outlook, we expect to be operating under much the same conditions as 2012 with similar challenges such as margin compression, and a very competitive environment with financial institutions vying for a reduced mortgage market and consumers trying to maximize the yield from their deposit dollars.

Meridian‟s focus in 2013 will be on setting the stage for an even more solid and stable financial future. Our 2012 financial results, although positive, highlighted the importance of achieving better balances between deposits and loans, and asset growth and return on equity (“ROE”) in order to enhance our long-term sustainability. Consequently, our top strategic objective for 2013 is sustainable growth. Sustainability will require continued emphasis on growing our Membership and deepening our relationships with all Members. It speaks to the need to be better able to fund our asset growth organically, through cost effective and diversified deposit sources that will provide stable long-term funding. We will be targeting balanced growth between organic loans and deposits and we will focus on ensuring that we are earning a fair return on the value that we offer our Members and the risk that we take on. By sustainability, we also mean achieving an ROE that exceeds our asset growth, and that will improve our capital ratios and quality of capital, reflecting reduced reliance on investment shares over time. The 2013 after-tax ROE target is 7.9% relative to a total asset growth rate of 6.0%. We will also focus our efforts on reducing our efficiency ratio.

Achieving these performance targets means that Meridian must grow profitably. We will do so by exploring new opportunities to generate income while providing value to Members, enhancing our treasury management to more effectively manage our liquidity and interest rate risks and managing our operating expenses. Meridian prides itself on offering a truly differentiated service experience to our Members, one that is founded on respect and on truly looking out for our Members‟ best interests. Literally, our goal is to have our Members‟ back. Our growth in 2013 will be driven by an ongoing focus on targeted marketing to get the “Meridian story” out, as well as new product offerings, an expansion of our branch network and enhanced overall sales and service capabilities.

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2012 Annual Report Consolidated Financial Statements

AN N ON M N X ON A NAN A A N

For the year ended December 31, 2012

Independent auditor’s report 34

Consolidated balance sheet 35

Consolidated statement of comprehensive income 36

Consolidated statement of changes in equity 37

Consolidatedstatementofcashflows 38

Notestotheconsolidatedfinancialstatements:

Nature of operations 39 Investments available for sale 55

Basis of preparation 39 Investment in associates 56

2.1 Statement of compliance 39 Investment in joint venture 57

2.2 Use of estimates and judgments 39 Intangible assets 58

2.3 Regulatory compliance 40 Property, plant and equipment 59

Summaryofsignificantaccountingpolicies 40 Other assets 60

3.1 Basis of consolidation 40 7 Members’ deposits 60

3.2 Business combinations 41 Borrowings 60

3.3 Foreign currency translation 41 Payables and other liabilities 61

3.4 Financialassetsandfinancialliabilities 41 Mortgage securitization liabilities 61

3.5 Interest income and expense 43 Provisions 63

3.6 Borrowing costs 43 Deferred income taxes 63

3.7 Fee and commission income 43 Pension and other employee obligations 64

3.8 Impairmentoffinancialassets 43 Share capital 68

3.9 Intangible assets 44 Net interest income 71

3.10 Property, plant and equipment 45 Non-interest income 72

3.11 Impairmentofnon-financialassets 45 7 Provision for income taxes 72

3.12 Leases 45 Related party transactions 73

3.13 Provisions 45 Contingent liabilities and commitments 75

3.14 Employeebenefits 46 Regulatory information 77

3.15 Income taxes 46 Financial risk management 77

3.16 Share capital 47 31.1 Credit risk 78

Changes in accounting policies 48 31.2 Market risk 79

Acquisitions 48 31.3 Liquidity risk 82

Cashandcashequivalents 50 31.4Fairvalueoffinancialassetsandfinancial 84

7 Receivables 51 liabilities

Investments - other loans and receivables 51 31.5 Capital management 87

Loans to Members 52 Events after the reporting period 87

Derivativefinancialinstruments 54 Authorizationofconsolidatedfinancialstatements 88

33

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34


AN N ON M N O A A N ANG N Q Y

For the year ended December 31, 2012 with comparative figures for 2011

(thousands of Canadian dollars)

u

u y

y $ 208,490 $ 104,761 $ 193,019 $ 506,270

Dividends on Members’ capital accounts - - (10,329) (10,329)

Shares issued as dividends 8,958 - - 8,958

Income tax savings on dividends - - 1,600 1,600

r n 8,958 - (8,729) 229

u i n - - - -

Profits for the year attributable to Members - - 24,750 24,750

Other comprehensive income:

Actuarial losses in defined benefit pension plans - - 254 254

Income taxes relating to components of other comprehensive income - - (39) (39)

o m h t y - - 24,965 24,965

$ 217,448 $ 104,761 $ 209,255 $ 531,464


u

u y

y $ 198,408 $ 45,920 $ 158,438 $ 402,766

Dividends on Members’ capital accounts - - (11,674) (11,674)

4 Shares issued as dividends 10,082 - - 10,082

Income tax savings on dividends - - 1,809 1,809

r h n 10,082 - (9,865) 217

u in n - 58,841 - 58,841

Profits for the year attributable to Members - - 53,871 53,871

Other comprehensive income:

Actuarial losses in defined benefit pension plans - - (11,154) (11,154)

Income taxes relating to components of other comprehensive income - - 1,729 1,729

h v t y - - 44,446 44,446

, $ 208,490 $ 104,761 $ 193,019 $ 506,270

See accompanying notes to the consolidated financial statements

37


AN N ON M N N O A NAN A A N For the year ended December 31, 2012 with comparative figures for 2011

Meridian Credit Union Limited (“the Credit Union” or “Meridian”) is incorporated in Canada under the Credit Unions and Caisses Populaires Act, (the “Act”) and is a member of the Deposit Insurance Corporation of Ontario (“DICO”) and of Central 1 Credit Union (“Central 1”). The Credit Union is headquartered at 75 Corporate Park Drive in St. Catharines, ON. The Credit Union primarily is involved in the raising of funds and the application of those funds in providing financial services to Members. The activities of the Credit Union are regulated by DICO. The Credit Union has 61 branches and eight commercial business centres across Ontario.

i n

2.1 t

The consolidated financial statements of the Credit Union have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and IFRIC interpretations as issued by the International Accounting Standards Board (“IASB”) and legislation for Ontario’s Credit Unions and Caisse Populaires.

2.2

The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the consolidated balance sheet date and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from such estimates. Estimates and judgments are continually evaluated and are made based on historical experience and other factors, including expectations of future events that are reasonable under the circumstances.

The items subject to the most significant application of judgment and estimates are as follows:

v n c As described in note 31.4, where the fair value of financial assets and financial liabilities cannot be derived from active markets, the Credit Union uses valuation techniques that include the use of mathematical models. The inputs to these models are derived from observable market data where possible, but where observable market data are not available, judgment is required to establish fair values. The judgments include considerations of liquidity and model inputs, such as discount rates and prepayment rates. Management believes that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments. Note 31.4 provides detailed information about the key assumptions used in the determination of the fair value of financial instruments, as well as the detailed sensitivity analysis for these assumptions.

v The Credit Union reviews its loan portfolio to assess impairment at each consolidated balance sheet date. In determining whether an impairment loss should be recorded in the consolidated statement of comprehensive income, the Credit Union makes judgments as to whether there is any objective evidence indicating an impairment trigger followed by a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with that portfolio. The assessment takes account of historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. The impairment loss on loans and advances is disclosed in more detail in note 3.8 and note 9.

The Credit Union performs an assessment of its intangible assets at each consolidated balance sheet date to determine whether an impairment loss should be recorded in the consolidated statement of comprehensive income. Core deposit intangibles comprise most of the Credit Union’s intangible assets. The carrying value of core deposit intangibles is significantly impacted by estimates about the future runoff pattern for the demand deposit portfolio to which the intangible asset relates as well as estimates used in determining the net cost of servicing the deposits compared to the alternative cost of borrowing. Management assesses actual runoff patterns on a regular basis to determine the impact on the remaining runoff estimates. Further details on impairment of intangible assets are disclosed in note 3.11.

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2.2

n z i n As part of its program of liquidity, capital and interest rate risk management, the Credit Union enters into arrangements to fund growth by entering into mortgage securitization arrangements. As a result of these transactions and depending on the nature of the arrangement, the Credit Union may be subject to the recognition of the funds received as secured borrowings and the continued recognition of the securitized assets. The determination of the requirements for continued recognition requires significant judgment. Further details of securitization arrangements are disclosed in note 20.

Deferred income tax assets are recognized in respect of unused tax losses or deductible temporary differences to the extent that it is probable that taxable income will be available against which the losses can be utilized. Judgment is required to determine the amount of deferred income tax assets that can be recognized, based on the likely timing and level of future taxable profits, together with future tax planning strategies.

Further details on deferred income taxes are included in note 3.15 and note 22. R n The present value of the retirement benefit obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The actuarial valuation involves making assumptions about discount rates, expected rates of return on assets, future salary increases, mortality rates and future pension increases. Due to the long-term nature of these plans, such estimates are subject to significant uncertainty. Any changes in these assumptions will impact the carrying value of the pension obligations. Note 23 provides detailed information about the key assumptions used in the valuation of retirement benefit obligations, as well as the detailed sensitivity analysis for these assumptions.

2.3 R y n

Regulations to the Act specify that certain items are required to be disclosed in the consolidated financial statements that are presented at annual meetings of Members. This information has been integrated into the consolidated financial statements and notes. When necessary, reasonable estimates and interpretations have been made in presenting this information.

Note 30 contains information disclosed to support regulatory compliance.

u y

These consolidated financial statements were prepared on a going concern basis, under the historical cost convention, as modified by the revaluation of financial assets and financial liabilities, including derivatives, at fair value. The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all of the years presented.

3.1 i n

The financial results of wholly owned subsidiaries of the Credit Union are included within these consolidated financial statements. All intercompany balances and transactions have been eliminated on consolidation. Investments in which the Credit Union exerts significant influence but not control over operating and financing decisions are accounted for using the equity method. Under equity accounting, investments are initially recorded at cost and adjusted for the Credit Union’s proportionate share of the net income or loss which is recorded in share of profits from investment in associate and share of profits from investment in joint venture in the consolidated statement of comprehensive income. Investments in which the Credit Union exercises joint control are initially recognized at cost and subsequently accounted for using the equity method. The Credit Union’s share of profits from investment in the joint venture is based on financial statements prepared up to a date not earlier than three months before the date of the consolidated balance sheet, adjusted to conform to the accounting policies of the Credit Union. The joint venture in which the Credit Union participates operates an office building, which generates income from leasing of space for commercial use.

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3.2 u

Business combinations are accounted for using the acquisition method. The acquisition method involves the recognition of the acquiree’s identifiable assets and liabilities, including contingent liabilities, regardless of whether they are recorded in the acquiree’s financial statements prior to acquisition. At acquisition date, the assets and liabilities of the acquired subsidiary are included in the consolidated balance sheet at their fair value, which are also used as the basis for subsequent measurement in accordance with the Credit Union’s accounting policies. Goodwill, if any, is stated after separating out identifiable intangible assets if the fair value of identifiable net assets at the date of acquisition is less than the consideration paid. Any excess of identifiable net assets over consideration paid is recognized in the consolidated statement of comprehensive income immediately after acquisition.

3.3 y

The consolidated financial statements are presented in Canadian dollars, which is the Credit Union’s functional and presentational currency. Monetary assets and liabilities denominated in foreign currencies, primarily United States (“U.S.”) dollars, are translated into Canadian dollars at exchange rates prevailing on the consolidated balance sheet date. Income and expenses are translated at the exchange rates in effect on the date of the transaction. Exchange gains and losses arising on the translation of monetary items are included in non-interest income for the year.

3.4 i

Financial assets and financial liabilities, including derivatives, are recognized on the consolidated balance sheet of the Credit Union at the time the Credit Union becomes a party to the contractual provisions of the instrument. The Credit Union recognizes financial instruments at the trade date. All financial assets and financial liabilities are measured at fair value on initial recognition.

There are four categories of financial assets: loans and receivables; fair value through profit or loss; held to maturity; and available for sale. Management classifies each financial asset to one of these categories at the time of initial recognition. The classification depends on the purpose for which the asset was acquired. The category determines how the financial asset will be subsequently measured and whether any resulting income and expense is recognized in profit or loss or in other comprehensive income. All financial assets are subject to review for impairment at least at each reporting date. Impairment is recognized when there is objective evidence that a financial asset or a group of financial assets is impaired. Different criteria to determine impairment are applied for each category of financial assets. The categories of financial assets are described below: (a) Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market (other than investments where the credit union intends to sell in the short-term or where the credit union may not recover substantially all of the investment, which have been designated as available for sale). The Credit Union has designated receivables, loans to Members and fixed term deposits with Central 1 as loans and receivables. Financial assets classified as loans and receivables are initially measured at fair value net of loan fees and direct transaction costs and are subsequently measured at amortized cost using the effective interest method of amortization less provision for impairment.

(b) Financial assets at fair value through profit or loss Financial assets at fair value through profit or loss include financial assets that are either classified as held for trading or that meet certain conditions and are designated at fair value through profit or loss on initial recognition. All of the Credit Union’s derivative financial instruments fall into this category as well as cash and cash equivalents, except for short-term investments with less than 100 days maturity from the date of acquisition, which are classified as loans and receivables. Financial assets at fair value through profit or loss are initially recognized at fair value, and transaction costs are expensed in the consolidated statement of comprehensive income. They are subsequently measured at fair value with gains and losses recognized in profit or loss.

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3.4 i n Derivative financial instruments Derivative financial instruments are contracts, such as options and futures, where the value of the contract is derived from the price of an underlying variable. The most common underlying variables include stocks, bonds, commodities, currencies, interest rates and market rates. The Credit Union periodically enters into derivative contracts to manage financial risks associated with movements in interest rates and other financial indices as well as to meet the requirements to participate in the Canada Mortgage Bond Program (“CMB Program”) for securitization as discussed in note 20. The Credit Union’s policy is not to utilize derivative financial instruments for trading or speculative purposes. Assets in this category are measured at fair value with gains or losses recognized in profit or loss in other interest income. Gains or losses on derivative financial instruments are based on changes in fair value determined by reference to active market transactions or using a valuation technique where no active market exists. Certain derivatives embedded in other financial instruments, such as the embedded option in an index-linked term deposit product, are treated as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract and the host contract is not carried at fair value through profit or loss. These embedded derivatives are separately accounted for at fair value, with changes in fair value recognized in profit or loss.

The Credit Union does not apply hedge accounting to its derivative portfolio. Cash and cash equivalents Cash and cash equivalents comprise balances with less than 100 days maturity from the date of acquisition. Given the short-term nature, the carrying value of cash and cash equivalents, excluding short-term investments, is a reasonable approximation of fair value. (c) Held to maturity financial assets Held to maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities that the Credit Union’s management has the positive intention and ability to hold to maturity. The Credit Union has not classified any of its financial assets as held to maturity investments. (d) Available for sale financial assets Available for sale financial assets are those intended to be held for an indefinite period of time, which may be sold in response to needs for liquidity or changes in interest rates, exchange rates or equity prices and which are not classified as loans and receivables, fair value through profit or loss or held to maturity. These would include those non-derivative financial assets that are explicitly designated as such or do not qualify for inclusion in any of the other categories of financial assets. The Credit Union has designated its equity investments not subject to significant influence as available for sale. Available for sale financial assets are initially recognized at fair value plus transaction costs. They are subsequently measured at fair value, with any resultant gain or loss recognized in other comprehensive income, except for impairment losses which are recognized in profit or loss. Investments in equity instruments that have been designated as available for sale but that do not have a quoted market price in an active market, and whose fair value cannot be reliably measured, are recorded at cost. When financial instruments are derecognized, the cumulative gains and losses previously recognized in other comprehensive income are recognized in profit or loss. Interest income earned on available for sale debt instruments is recognized in profit or loss in other interest income. Dividends received on available for sale equity instruments are recognized in profit or loss in other interest income.

There are two categories of financial liabilities: fair value through profit or loss; and other liabilities. Management classifies each financial liability to one of these categories at the time of initial recognition. The category determines how the financial liability will be subsequently measured and whether any resulting income and expense is recognized in profit or loss or in other comprehensive income.

The categories of financial liabilities are described below: (a) Financial liabilities at fair value through profit or loss The Credit Union’s derivative financial instruments fall into this category and are described above under financial assets. (b) Other liabilities The Credit Union has designated all financial liabilities other than derivative financial liabilities as other liabilities. These include Members’ deposits, borrowings, mortgage securitization liabilities and trade and other payables. Other liabilities are initially recorded at fair value and subsequently measured at amortized cost using the effective interest method.

42



3.4 i n

nc n Financial assets are derecognized when the Credit Union no longer has contractual rights to the cash flows from the asset, or when substantially all of the risks and rewards of ownership are transferred. If the Credit Union has neither transferred nor retained substantially all the risks and rewards of ownership, it assesses whether it has retained control over the transferred asset. A financial liability is derecognized when it is extinguished, discharged, cancelled or expired.

3.5 n x n

Interest income and expense for all interest-bearing financial instruments, except those designated as fair value through profit or loss, are recognized within interest income or interest expense in the consolidated statement of comprehensive income as they accrue using the effective interest method. Once a financial asset has been written down as a result of an impairment loss, interest income is recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. The effective interest rate is the rate that exactly discounts the estimated future cash payments and receipts through the expected life of the financial asset or financial liability to its fair value at inception. The effective interest rate is established on initial recognition of the financial asset or liability and incorporates any fees and transaction costs that are integral to establishing the contract.

3.6

Borrowing costs primarily comprise interest on the Credit Union’s borrowings. Meridian does not self-construct any assets with the exception of new branches and software enhancements. General borrowing costs relating to self-constructed assets are not significant and, therefore, have not been capitalized. All borrowing costs are expensed in the period in which they are incurred and reported within interest expense on the consolidated statement of comprehensive income.

3.7 n Fee and commission income not directly attributable to the acquisition of financial instruments is recognized when the related service is provided and the income is contractually due. Fee and commission income is included in non-interest income on the consolidated statement of comprehensive income. Fee and commission income that is directly attributable to acquiring or issuing a financial asset or financial liability not classified as fair value through profit or loss, is added to or deducted from the initial carrying value. Fee and commission income is then included in the calculation of the effective interest rate and amortized through profit or loss over the term of the financial asset or financial liability. For financial instruments carried at fair value through profit or loss, transaction costs are immediately recognized in profit or loss on initial recognition.

3.8 n c The Credit Union assesses at each consolidated balance sheet date whether there is objective evidence that a financial asset or group of financial assets is impaired. (a) Financial assets carried at amortized cost A financial asset or group of financial assets are impaired only if there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a “loss event”) and that loss event or events has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. The criteria that the Credit Union uses to determine that there is objective evidence of an impairment include delinquency in contractual payments of principal or interest, financial difficulties experienced by the borrower, breach of loan covenants or conditions, initiation of bankruptcy proceedings or deterioration in the value of collateral.

43



3.8 The Credit Union completes an assessment to determine whether objective evidence of impairment exists on an individual and/or collective basis. If the Credit Union determines that objective evidence of impairment does not exist for an individually assessed financial asset, it includes the asset in a group of financial assets with similar credit risk characteristics and collectively assesses the group for impairment. Assets that are individually assessed for impairment and for which an impairment is identified, are not included in the collective assessment of impairment. The specific allowance assessed on an individual financial asset is measured as the amount that is required to reduce the carrying value of the impaired asset to its estimated realizable amount, which is generally the fair value of the security underlying the asset, net of expected costs of realization. Expected costs of realization are determined by discounting at the financial asset’s original effective interest rate. The carrying value of the asset is reduced through the use of an allowance account and the amount of the loss is recognized in the consolidated statement of comprehensive income. The estimated period between when a loss occurs and its identification is determined by management to be 12 months, on average, for the purpose of collectively provisioning loans. For the purposes of the collective evaluation of impairment, financial assets are grouped on the basis of similar credit risk characteristics. Future cash flows within each group are estimated on the basis of the contractual cash flows of the assets in the group and historical loss experience for assets with credit risk characteristics similar to those in the group. Historical loss experience is adjusted on the basis of current observable data to reflect the effects of current conditions that did not affect the period on which the historical loss experience is based and to remove the effects of conditions in the historical period that do not currently exist. The methodology and assumptions used for estimating future cash flows are reviewed regularly by the Credit Union to reduce any differences between loss estimates and actual loss experience. An impairment loss on an investment carried at amortized cost is reversed if the reversal can be related objectively to an event occurring after the impairment loss was recognized. The reversal is recognized in the consolidated statement of comprehensive income. (b) Financial assets classified as available for sale When objective evidence of impairment exists, which may include a decline in fair value or recoverable amount of the future cash flows below the cost that is other than temporary, an impairment loss is recorded. All impairment losses are recognized in the consolidated statement of comprehensive income. Any decline in fair value of an available for sale financial asset recognized previously in other comprehensive income that is considered to be impaired is taken into profit or loss for the year. Impairment losses relating to an available for sale debt instrument are reversed when in a subsequent period, the fair value of the instrument increases and the increase can be objectively related to an event occurring after the loss was recognized.

3.9 n n i

Intangible assets acquired separately

Intangible assets acquired separately include computer software other than software which is considered to be an integral part of property classified as property, plant and equipment, which is included in computer hardware and software. Intangible assets acquired separately are recorded at historical cost.

Intangible assets acquired through business combinations Intangible assets acquired through business combinations include the fair value of contractual rights relating to the mutual fund portfolios of acquired Members as well as core deposit intangibles representing the cost savings inherent in acquiring a deposit portfolio with a lower cost of funding versus going into the market for the funds.

Intangible assets with a limited life are amortized to income on a straight-line basis over the period during which the assets are anticipated to provide economic benefit, which currently ranges from three to ten years. Intangible assets are subject to impairment review as described in note 3.11. The Credit Union does not have any intangible assets with indefinite lives. The Credit Union has not recognized any internally generated intangible assets.

44



3.10 y u

Recognition and measurement Land is carried at cost less impairment losses. Buildings and equipment are measured at cost less accumulated depreciation and impairment losses. Cost includes expenditures that are directly attributable to the acquisition of the asset. Purchased software that is integral to the functionality of the related equipment is capitalized as part of the computer hardware.

Depreciation

Land is not depreciated. Depreciation of other assets commences when the asset is available for use and is calculated using the straight-line method over the estimated useful lives of the related assets as follows:

Buildings and improvements 5-40 years Furniture and office equipment 5-10 years Computer hardware and software 3-5 years Automobiles 3 years Leasehold improvements lease term to a maximum of 10 years

Where components of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment.

Residual value estimates and estimates of useful life are reviewed, and adjusted if appropriate, at each consolidated balance sheet date.

Assets are subject to impairment review as described under note 3.11.

3.11 Non-financial assets that are subject to amortization or depreciation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. An impairment loss is recognized for the amount by which the asset’s carrying value exceeds its recoverable amount. For non-financial assets with the exception of core deposit intangible assets, the recoverable amount is the higher of an asset’s fair value less costs to sell and value in use. For the purpose of assessing impairment, assets are grouped at the branch level. This is considered to be the lowest level for which there are separately identifiable cash flows (i.e. the cash-generating units). For core deposit intangibles, the recoverable amount is determined by applying current assumptions about the inherent cost savings and runoff patterns to the remaining deposit portfolio balance. Non-financial assets that have suffered impairment are reviewed for possible reversal of the impairment at each reporting date.

3.12

Leases where the Credit Union assumes substantially all the risks and rewards of ownership are classified as finance leases. On initial recognition the leased asset under a finance lease is measured at an amount equal to the lower of its fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the asset is accounted for in accordance with the accounting policy applicable to the asset and depreciated using the straight-line method over the term of the lease. The interest element of the finance cost is charged to profit or loss over the lease period.

Other leases are operating leases and the leased assets are not recognized on the Credit Union’s consolidated balance sheet. Payments made under operating leases are charged to profit or loss on a straight-line basis over the period of the lease.

3.13 Provisions are recognized when the Credit Union has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate of the amount can be made. Where the Credit Union expects a provision to be reimbursed, the reimbursement is recognized as an asset only when the reimbursement is virtually certain. At each consolidated balance sheet date, the Credit Union assesses the adequacy of its pre-existing provisions and adjusts the amounts as necessary based on actual experience and changes in future estimates.

Provisions are measured at the present value of the estimated expenditure required to settle the present obligation and are recorded within operating expenses on the consolidated statement of comprehensive income.

45



3.14 (a) Pension obligations

The Credit Union provides post-employment benefits through defined benefit plans as well as a defined contribution plan.

A defined contribution plan is a pension plan under which the Credit Union pays fixed contributions into a separate entity. The Credit Union has no legal or constructive obligation to pay further contributions after its payment of the fixed contribution. The contributions are recognized as employee benefit expense when they are due.

A defined benefit plan is a pension plan that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors, such as age, years of service and compensation. The cost of the plan is actuarially determined using the projected benefit method pro-rated on service and management’s best estimate of discount rates, expected plan investment performance, salary escalation, and retirement ages of employees. The plans include an annual indexation of the lesser of 4% or the increase in the previous calendar year’s Consumer Price Index. Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are recognized immediately in other comprehensive income. Past service costs are recognized immediately in salaries and employee benefits on the statement of comprehensive income. The obligations are valued annually by independent qualified actuaries using the projected benefit method. The liability recognized in the consolidated balance sheet for defined benefit plans is the present value of the defined benefit obligation at the consolidated balance sheet date less the fair value of plan assets together with adjustments for unrecognized past service costs.

(b) Other post-retirement obligations

Other post-retirement obligations include health and dental care benefits for eligible retired employees. The expected costs of these benefits are accrued over the period of employment using an accounting methodology similar to that for defined benefit pension plans along with management’s best estimate of expected health care costs. (c) Other short-term benefits Liabilities for employee benefits for wages, salaries, termination pay and vacation pay represent the undiscounted amount which the Credit Union expects to pay as at the consolidated balance sheet date including related costs.

3.15 n m x

Income taxes on the consolidated statement of comprehensive income comprises current and deferred income taxes. Income taxes are recognized in profit or loss, except to the extent that they relate to items recognized directly in other comprehensive income, in which case they are recognized in other comprehensive income.

Current income taxes are the expected taxes refundable or payable on the taxable income for the year, using tax rates enacted or substantively enacted at the consolidated balance sheet date, and any adjustment to tax payable in respect of previous years.

Deferred income taxes are recognized using the liability method, providing for temporary differences between the carrying values of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The amount of deferred income tax provided is based on the expected manner of realization or settlement of the carrying value of assets and liabilities, using tax rates enacted or substantively enacted at the consolidated balance sheet date. A deferred income tax asset is recognized only to the extent that it is probable that future taxable profits will be available against which the asset can be utilized. Deferred income tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be utilized.

46



3.16 h l

(a) Member shares Shares are classified as liabilities or Members’ equity, according to their terms. Where shares are redeemable at the option of the Member, either on demand or on withdrawal from membership, the shares are classified as liabilities. Residual value in excess of the face value on Member share liabilities, if any, is classified as equity. Where shares are redeemable at the discretion of the Credit Union’s Board of Directors, the shares are classified as equity.

(b) Distributions to Members

Dividends on shares classified as liabilities are charged to profit or loss, while dividends on shares classified as equity are charged to retained earnings on the date at which the distributions are declared payable by the Credit Union’s Board of Directors.

(c) Share issue costs Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction, net of income taxes, from the proceeds.

4 n n un n c

Standards issued but not yet effective up to the date of issuance of the Credit Union’s financial statements are listed below. This listing is of standards and interpretations issued, which are expected to apply to the Credit Union at a future date. The Credit Union intends to adopt these standards when they become effective.

(a) IFRS 9, Financial Instruments, was issued in November 2009 and addresses classification and measurement of financial assets. It replaces the multiple category and measurement models in International Accounting Standard (“IAS”) 39, Financial Instruments: Recognition and Measurement, for debt instruments with a new mixed measurement model having only two categories: amortized cost and fair value through profit or loss. IFRS 9 also replaces the models for measuring equity instruments. Such instruments are either recognized at fair value through profit or loss or, where recognition through profit or loss creates an accounting mismatch, at fair value through other comprehensive income. Requirements for financial liabilities were added to IFRS 9 in October 2010 and they largely carried forward existing requirements in IAS 39, except that fair value changes due to credit risk for liabilities designated at fair value through profit or loss are generally recorded in other comprehensive income. Revisions to this standard are effective for annual periods beginning on or after January 1, 2015. The Credit Union does not anticipate any changes to the measurement basis of its financial assets or financial liabilities as a result of these changes in accounting policy.

(b) IFRS 10, Consolidated Financial Statements and IFRS 11, Joint Arrangements, were issued in May 2011. IFRS 10 provides a single consolidation model that identifies control as the basis for consolidation for all types of entities. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces Standing Interpretations Committee (“SIC”)-12, Consolidation - Special Purpose Entities, and parts of IAS 27, Consolidated and Separate Financial Statements. IFRS 11 provides guidance on accounting for arrangements where two or more parties have joint control.

IFRS 12, Disclosure of Interests in Other Entities, combines, enhances and replaces the disclosure requirements for subsidiaries, joint arrangements, associates and unconsolidated structured entities. Revisions to these standards are effective for annual periods beginning on or after January 1, 2013. The Credit Union has assessed these revisions and concluded that there are no changes in the method of accounting for its investees as a result of the changes to IFRS 10, IFRS 11 and IFRS 12. There will be some additional disclosure requirements that will be incorporated in the 2013 consolidated financial statements. (c) IFRS 13, Fair Value Measurement, was issued in May 2011. IFRS 13 defines fair value, sets out in a single IFRS a framework for measuring fair value and requires disclosure about fair value measurements. IFRS 13 applies when other IFRS require or permit fair value measurements. It does not introduce any new requirements to measure an asset or a liability at fair value, change what is measured at fair value in IFRS or address how to present changes in fair value. The new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date.

The new requirements are effective for annual periods beginning on or after January 1, 2013. The Credit Union does not anticipate any changes in the valuation of its financial assets or financial liabilities as a result of this standard.

47



n

There was no gain or loss incurred as a result of the transaction and the acquisition is expected to have minimal impact on the results of the Credit Union.

n

Effective June 1, 2011 the Credit Union acquired all of the assets and assumed all of the liabilities of Desjardins Credit Union (“DCU”), a financial services cooperative with 19 branches operating across Ontario and its head office in Whitby, Ontario. DCU was owned by its Members and was associated with Desjardins Group, the largest cooperative financial group in Canada. The Credit Union obtained control through the execution of a share purchase agreement and an amalgamation agreement. Under the terms of these agreements, the Members of DCU became Members of the Credit Union. The additional resources and expanded Membership that the Credit Union acquired through this business acquisition resulted in significant growth for Meridian. Increased economies of scale are expected to add to the Credit Union’s profitability, and facilitate continued investment in products, services, technology and people. The acquisition has expanded the Credit Union’s footprint to areas not previously serviced by Meridian, which allows Members access to more branches, and allows the Credit Union to deliver financial services to more Ontarians. Consideration transferred Under the terms of the amalgamation and share purchase agreements, the Credit Union issued 46,228 shares of the amalgamated credit union to the ex-DCU Members, and also paid Desjardins Group $10,000,000 in cash in order to acquire its interest in DCU. The value of the issued shares was determined by valuing the business acquired using the net asset value approach. The table below provides a summary of the components of the consideration transferred in the business combination.


Cash paid 10,000

Fair value of shares provided to ex-DCU Members 59,056

v 69,056

Acquisition-related costs amounting to $1,290,814 were excluded from the consideration transferred and recognized as an expense in the 2011 consolidated statement of comprehensive income, within non-interest expenses.

v h


Cash and cash equivalents 374,069

Loans to Members 849,040

Derivative financial assets 3,941

Investments available for sale 117,370

Intangible assets 17,084

Property, plant and equipment 2,490

Deferred income tax assets 13,778

Other assets 1,410

r 1,379,182

Members’ deposits 1,259,754

Payables and other liabilities 21,020

Pension and other employee obligations 1,828

1,282,602

96,580

49



n n i


v

h

Y m

y , 12,855 913 1,412 15,180

Additions, separately acquired - - 1,424 1,424

Amortization (4,811) (298) (610) (5,719)

y u 8,044 615 2,226 10,885

m

Cost 16,872 3,067 8,707 28,646

Accumulated amortization 8,828 2,452 6,481 17,761

y v u 8,044 615 2,226 10,885


v

h

Y m

, - 996 491 1,487

Additions, separately acquired - - 1,252 1,252

Acquisition 16,872 212 - 17,084

Amortization (4,017) (295) (331) (4,643)

A y u 12,855 913 1,412 15,180

m

Cost 16,872 3,067 7,283 27,222

Accumulated amortization 4,017 2,154 5,871 12,042

v u 12,855 913 1,412 15,180

58



h

(number of shares)

h y”

h

A

r A

b

y 51,574,888 36,090,253 3,021,948 47,161,053 60,776,717 1,041,533

Shares issued to (redeemed by) new Members

- - - - - 210,081

Shares issued as dividends 2,803,715 1,921,919 175,090 2,489,130 2,692,343 -

54,378,603 38,012,172 3,197,038 49,650,183 63,469,060 1,251,614

Shares issued to (redeemed by) new Members

- - - - - 27,562

Shares issued as dividends 2,359,708 1,586,522 146,468 1,993,479 2,871,306 -

, 56,738,311 39,598,694 3,343,506 51,643,662 66,340,366 1,279,176

(a) Authorized share capital The authorized share capital of the Credit Union consists of the following: (i) an unlimited number of Class A special shares, issuable in series (“Class A shares”); (ii) an unlimited number of Class B special shares, issuable in series (“Class B shares”); and (iii) an unlimited number of Membership shares. Membership shares rank junior to Class A shares and to Class B shares for priority in the payment of dividends and, in the event of the liquidation, dissolution or winding up of the Credit Union. In addition, Class B shares rank junior to Class A shares. There are no Class B shares outstanding. (b) Class A shares “50th Anniversary” Class A shares The “50th Anniversary” Class A shares are non-cumulative, non-voting, non-participating shares with a minimum dividend rate adjusted every five years. The new dividend rate for each five-year period will be set by the Board in its absolute discretion at a rate not less than the chartered bank average five-year GIC rate published by the Bank of Canada Review. The dividend rate for the five-year period beginning on January 1, 2011 was set at 4.75%. The holders of the “50th Anniversary” Class A shares are entitled to receive dividends, as and when declared by the Board, subject to availability of sufficient earnings to meet the regulatory capital requirements of the Act described in note 31.5. Dividends for the “50th Anniversary” Class A shares are non-cumulative and payable annually on January 1, if and when declared. Dividends declared and paid to shareholders of “50th Anniversary” Class A shares in 2012 for the year end December 31, 2011 amounted to $2,581,698 (2011 - $3,093,447), of which $2,359,708 (2011 - $2,803,715) was paid in the form of “50th Anniversary” Class A shares. These shares are redeemable at the sole and absolute discretion of the Credit Union’s Board of Directors. Based on these redemption characteristics, these shares have been recorded within Members’ equity as Members’ capital accounts. Series 96 Class A shares The series 96 Class A shares are cumulative, non-voting, non-participating shares with a dividend rate adjusted every five years. The new dividend rate for each five-year period will be set by the Board in its absolute discretion at a rate not less than 1% above the chartered bank average five-year GIC rate published by the Bank of Canada Review. The dividend rate for the five-year period beginning September 27, 2011 was set at 4.50% (previous period’s rate was 5.75%). The holders of series 96 Class A shares are entitled to receive dividends, if and when declared by the Board, subject to availability of sufficient earnings to meet the regulatory capital requirements of the Act described in note 31.5. Dividends for the series 96 Class A shares are cumulative and payable annually on the anniversary date. Dividends declared and paid to shareholders of series 96 Class A shares in 2012 for the period ended September 26, 2012 amounted to $1,711,362 (2011 - $2,076,054), of which $1,586,522 (2011 - $1,921,919) was paid in the form of series 96 Class A shares. These shares are redeemable at the sole and absolute discretion of the Credit Union’s Board of Directors. Based on these redemption characteristics, these shares have been recorded within Members’ equity as Members’ capital accounts.

69



h Series 98 Class A shares The series 98 Class A shares are non-cumulative, non-voting, non-participating shares with a minimum dividend rate of the average of the month-end five-year GIC rates for the period, plus 1%. The holders of series 98 Class A shares are entitled to receive dividends, as and when declared by the Board, subject to availability of sufficient earnings to meet the regulatory capital requirements of the Act described in note 31.5. Dividends for the series 98 Class A shares are non-cumulative and payable annually on January 1, if and when declared. Dividends declared and paid to shareholders of series 98 Class A shares in 2012 for the period ended December 31, 2011 amounted to $151,712 (2011 - $181,191), of which $146,468 (2011 - $175,090) was paid in the form of series 98 Class A shares. These shares are redeemable at the sole and absolute discretion of the Credit Union’s Board of Directors. Based on these redemption characteristics, these shares have been recorded within Members’ equity as Members’ capital accounts. Series 01 Class A shares The series 01 Class A shares are non-cumulative, non-voting, non-participating shares with a minimum dividend rate adjusted every five years. The new dividend rate for each five-year period will be set by the Board in its absolute discretion at a rate not less than 1% above the chartered bank average five-year GIC rate published by the Bank of Canada Review. The dividend rate for the five-year period beginning on December 12, 2011 was set at 4.50% (previous period’s rate was 6.00%). The holders of series 01 Class A shares are entitled to receive dividends, as and when declared by the Board, subject to availability of sufficient earnings to meet the regulatory capital requirements of the Act described in note 31.5. Dividends for the series 01 Class A shares are non-cumulative and payable annually on the anniversary date, if and when declared. Dividends declared and paid to shareholders of series 01 Class A shares in 2012 for the period ended December 11, 2012 amounted to $2,235,616 (2011 - $2,830,988), of which $1,993,479 (2011 - $2,489,130) was paid in the form of series 01 Class A shares. These shares are redeemable at the sole and absolute discretion of the Credit Union’s Board of Directors. Based on these redemption characteristics, these shares have been recorded within Members’ equity as Members’ capital accounts. Series 09 Class A shares The series 09 Class A shares are non-cumulative, non-voting, non-participating shares with a minimum dividend rate adjusted every five years. The new dividend rate for each five-year period will be set by the Board in its absolute discretion at a rate not less than the chartered bank average five-year GIC rate published by the Bank of Canada Review. The dividend rate was set at 5.75% for dividend payments relating to fiscal years on or before December 31, 2014. The holders of series 09 Class A shares are entitled to receive dividends, as and when declared by the Board, subject to availability of sufficient earnings to meet the regulatory capital requirements of the Act described in note 31.5. Dividends for the series 09 Class A shares are non-cumulative and payable annually following each fiscal year-end and prior to the annual general meeting of Members, if and when declared. Dividends declared and paid to shareholders of series 09 Class A shares in 2012 for the period ended December 31, 2011 amounted to $3,648,162 (2011 - $3,493,116) of which $2,871,306 (2011 - $2,692,343) was paid in the form of series 09 Class A shares. These shares are redeemable at the sole and absolute discretion of the Credit Union’s Board of Directors not before the end of the fifth year from the date of issuance. Based on these redemption characteristics, these shares have been recorded within Members’ equity as Members’ capital accounts. (c) Membership shares Par value of one Membership share of the Credit Union is $5. Members under the age of 18 must hold two shares; those 18 and older must hold five shares. There were 262,379 Members at December 31, 2012 (2011 – 252,097). These shares are redeemable at their issue price only when the Member withdraws from Membership in the Credit Union subject to: (i) the Credit Union’s meeting capital adequacy requirements; and (ii) the discretion of the Board, who may require notice. Based on the redemption features of these shares, they have been recorded as Membership shares within the liability portion of the consolidated balance sheet, and have been designated as other liabilities. The residual equity component is $nil.

70



n n The Credit Union offers MasterCard and its services through a contract with Credit Union Electronic Transaction Services and Unified Network Payment Solutions. Where MasterCard credit limits must be fully secured by the Credit Union, a guarantee of 100% of the approved credit limit for the life of the account, plus up to 90 days’ interest will be made by the Credit Union. The Credit Union will in turn hold at least an equivalent amount of the credit limit approved for the MasterCard from the cardholder through an assignment of funds on deposit or a pledge of term deposits. These guarantees are considered by management to be in the normal course of business. The maximum potential amounts of future payments the Credit Union could be required to make under the guarantee before any amounts that may possibly be recovered are not readily determinable. An estimate of the maximum potential amount cannot be estimated as the cardholder balances fluctuate depending on use. Management considers that the costs are not material as the assignment or pledge of funds is expected to cover cardholder balances in default.

y

t

The Credit Union employs the definition of restricted party contained in the Act and regulations. A restricted party includes a person who is, or has been within the preceding twelve months, a director, officer or auditor of the Credit Union, any corporation in which the person owns more than 10% of the voting shares, his or her spouse, their dependent relatives who live in the same household as the person, and any corporation controlled by such spouse or dependent relative. As at December 31, 2012, the aggregate value of loans issued to restricted parties was $14,426,152 (2011 - $14,980,601). These loans have been advanced on the same terms and conditions as have been accorded to all Members of the Credit Union. There was no allowance for impaired loans required in respect of these loans. Directors received $394,667 (2011 - $328,591) for annual retainer and per diem and $40,833 (2011 - $42,268) for reimbursement of travel and out-of-pocket expenses.

n

The Act requires credit unions to disclose remuneration paid during the year to the officers and employees of the Credit Union whose total remuneration for the year exceeds $150,000. If there are more than five officers and employees of a credit union whose total remuneration for the year was over $150,000, the five officers and employees with the highest total remuneration for the year are disclosed. The table below provides this information for the current year.

(thousands of Canadian dollars) y

nu

y v n

Sean Jackson, President & CEO 461,242 338,200 99,593

Bill Maurin, Acting CEO and Chief Financial Officer 274,711 257,760 53,044

Gary Genik, Chief Information Officer 269,808 235,104 50,020

Tom Wise, Chief of Staff 257,019 210,096 55,277

Bill Whyte, Chief Member Services Officer 250,000 58,000 47,441

The annual premium paid to the DICO for insuring Members’ deposits during the year ended December 31, 2012 was $5,240,974 (2011 - $4,343,486). The premium rates are based on relative risk to the insurance fund as measured by an overall composite risk score encompassing financial and other risk based factors.

The total fees paid to Central 1 amounted to $3,877,173 (2011 - $3,358,352). These fees were primarily in respect of Membership dues, banking and clearing, and other services.

k m

The Board of Directors has overall responsibility for the establishment and oversight of the Credit Union’s risk management framework. The Board has established the Audit Committee and charged it with the responsibility for, among other things, the development and monitoring of risk management policies. The Audit Committee reports regularly to the Board on its activities.

77



31.1 k

Credit risk is the potential for financial loss to the Credit Union if a borrower or guarantor fails to meet payment obligations in accordance with agreed terms. Credit risk is one of the most significant and pervasive risks in the business of a credit union. Every loan, extension of credit or transaction that involves settlements between the Credit Union and other parties or financial institutions exposes the Credit Union to some degree of credit risk.

The Credit Union’s primary objective is to create a methodological approach to credit risk assessment in order to better understand, select and manage exposures to deliver stable ongoing earnings. The strategy is to ensure central oversight of credit risk, fostering a culture of accountability, independence and balance. The responsibility for credit risk management is organization wide in scope, and is managed through an infrastructure based on: (i) centralized approval by the Board, of the Credit Risk Management Policy including, but not limited to, the following six

areas: a. credit risk assessment, including policies related to credit risk analysis, risk rating and risk scoring; b. credit risk mitigation, including credit structuring, collateral and guarantees; c. credit risk approval, including credit risk limits and exceptions; d. credit documentation focusing on documentation and administration; e. credit reviews that focus on monitoring of financial performance, covenant compliance and any sign of

deteriorating risk; f. credit portfolio management, including sectoral, geographic, and overall risk concentration limits and risk

quantification; (ii) centralized approval by the Vice President Credit Management of the discretionary limits of lending officers throughout

the Credit Union; (iii) credit adjudication subject to compliance with established policies, exposure guidelines and discretionary limits, as well

as adherence to established standards of credit assessment. Credit approvals are escalated to the Chief Financial Officer (“CFO”), Chief Executive Officer (“CEO”) and, where appropriate, to the Credit & Investment Committee of the Board, dependent on credit exposure level and restricted party transactions;

(iv) credit department oversight of the following: a. the establishment of guidelines to monitor and limit concentrations in the portfolios in accordance with Board-

approved policies governing industry risk and group exposures; b. the development and implementation of credit risk models and policies for establishing borrower risk ratings to

quantify and monitor the level of risk and facilitate management of commercial credit business; c. approval of the scoring techniques and standards used in extending, monitoring and reporting of personal credit

business; and d. implementation of an ongoing monitoring process of the key risk parameters used in our credit risk models.

The Board has delegated to the CEO the authority to establish a lending hierarchy. As such, a procedure for the delegation of lending authority has been developed and is in active use. The Credit Union employs persons who are trained in managing its credit granting activities. Staff may be designated individual authorities based on experience and background. Designated staff whose primary job accountabilities are to manage the quality and risk of the Credit Union’s portfolio are granted the authority to use judgment and discretion consistent with policy, in discharging their duties. Management has the responsibility to: (i) systematically identify, quantify, control and report on existing and potential credit risks and environmental risks in the

loan portfolio; (ii) prudently manage the exposure to default and loss arising from those risks; and (iii) employ and train, as necessary, personnel who can implement risk measurement and credit management techniques,

as required by policy. Measuring, monitoring and reporting activities on risk position and exposure are maintained and compliance and audit responsibilities are in place and adhered to. The Credit & Investment Committee of the Board receives regular summary performance measurements of the credit portfolio. The Credit Union’s credit risk portfolio is primarily classified as “retail” or “commercial/agricultural”, and a different risk measurement process is employed for each portfolio. Credit risk rating systems are designed to assess and quantify the risk inherent in credit activities in an accurate and consistent manner. Credit exposure is assessed along these two dimensions: probability of default, which is an estimate of the probability that an obligor with a certain borrower risk rating will default within a one-year time horizon, and loss given default, which represents the portion of credit exposure at default expected to be lost when an obligor defaults. The Credit Union follows a formal loan granting process that addresses appropriate security documentation, its registration, the need and use of credit bureau reports and other searches, situations where co-signers or guarantors may be or will be required, the use of wage assignments and the use of accredited appraisers, lawyers and other professionals.

78



31.1 k nu The Credit Union’s credit risk portfolio is diversified with the objective of spreading risk. Diversification is assessed using different measures in each portfolio. In the retail portfolio, diversification areas include authorized loan types, forms of security and sectoral groupings and/or such other objective criteria that the Board may set from time to time. In the commercial loan portfolio, diversification is achieved through the establishment of credit exposure limits for specific industry sectors, individual borrowers and borrower groups (multiple borrowers grouped together based on shared security and/or the same income source). Industry rating models and detailed industry analysis are key elements of this process. Where several industry segments are affected by common risk factors, an exposure limit may be assigned to those segments in aggregate. Management regularly reviews the above parameters to ensure that acceptable diversification is maintained. The top five industry sectors represent approximately 61% (2011 - 59%) of the total commercial loan portfolio. Credit scoring is the primary risk rating system for assessing retail exposure risk. Retail exposure is managed on a pooled basis, where each pool consists of exposures that possess similar homogeneous characteristics. The retail credit segment is composed of a large number of Members, and includes residential mortgages, as well as secured and unsecured loans and lines of credit. Requests for retail credit are processed using automated credit and behavioural decisioning tools. Standard evaluation criteria may include, but are not limited to: gross debt service ratio, total debt service ratio, and loan to value ratio. Within this framework, underwriters in branches and corporate office operate within designated approval limits. Retail exposures are assessed on a pooled basis and measured against an internal benchmark of acceptable risk penetration levels within each pool. Internal benchmarks are established using “Equifax Beacon score”. Equifax Inc. is a global service provider of this credit score, which is a mathematical model used to predict how likely a person is to repay a loan. The score is based on information contained in an individual’s credit report. This information is obtained from credit lenders from which the consumers have borrowed in the past. The benchmark is measured monthly to ensure that the risk of the portfolio is managed on an ongoing basis. The risk ratings of the portfolio range from A+, which represents very low risk, to E, which represents the highest risk. The commercial credit risk rating model is premised on a comprehensive assessment of the borrower’s risk of default, through measurement of industry, business, management and financial risk factors along with the risk of loss given default, based on assessment of security composition and relative historical recovery experience. The model includes a standard set of questions and answers that align to an implied level of risk. Questions are given varied weightings and an overall borrower risk rating is derived from a cumulative weighting of the answers. The commercial loan portfolio stratified by risk rating is reviewed monthly. The Credit Union’s credit risk policies, processes and methodologies have not changed materially from the prior year, except for the commercial risk rating model as noted above, where the risk rating scale has been expanded from six to nine ratings, and from primarily two input measurements to a mix of twenty-two questions addressing various components of risk. Except as noted, the carrying value of financial assets recorded in the consolidated financial statements, which is net of impairment losses, represents the Credit Union’s maximum exposure to credit risk without taking into account the value of any collateral obtained. The Credit Union is also exposed to credit risk through transactions, which are not recognized in the consolidated balance sheet, such as granting financial guarantees and extending loan commitments. Refer to note 29 for further details. The risk of losses from loans undertaken is reduced by the nature and quality of collateral obtained. Refer to note 9 for a description of the nature of the security held against loans as at the consolidated balance sheet date.

31.2 t k

(a) Interest rate risk Interest rate risk is the sensitivity of the Credit Union’s financial position to movements in interest rates. The Credit Union is exposed to interest rate risk when it enters into banking transactions with its Members, namely deposit taking and lending. When asset and liability principal and interest cash flows have different payment or maturity dates, this results in mismatched positions. An interest-sensitive asset or liability is repriced when interest rates change, when there is cash flow from final maturity, normal amortization, or when Members exercise prepayment, conversion or redemption options offered for the specific product. The Credit Union’s exposure to interest rate risk depends on the size and direction of interest rate changes, and on the size and maturity of the mismatched positions. It is also affected by new business volumes, renewals of loans or deposits, and how actively Members exercise options, such as prepaying a loan before its maturity date. The Credit Union’s interest rate risk is subject to extensive risk management controls and is managed within the framework of policies and limits approved by the Board. These policies and limits ensure, among other things, that the Credit Union is in full adherence to the regulatory requirements prescribed in the Act as well as DICO’s standards of Sound Business and Financial Practices. Overall responsibility for asset/liability management rests with the Board. As such, the Board receives regular reports on risk exposures and performance against approved limits. The Board delegates the responsibility to manage the interest rate risk on a day-to-day basis to the Asset/Liability Committee (“ALCO”), which meets no less frequently than monthly. ALCO is chaired by the CFO and includes other senior executives.

79



31.2 k t k n The key elements of the Credit Union’s interest rate risk management framework include:

i. guidelines and limits on the structuring of the maturities, price and mix of deposits, loans, mortgages and investments and the management of asset cash flows in relation to liability cash flows;

ii. guidelines and limits on the use of derivative products to hedge against a risk of loss from interest rate changes; and

iii. requirements for comprehensive measuring, monitoring and reporting on risk position and exposure management. Valuations of all asset and liability positions, as well as off-balance sheet exposures, are performed no less frequently than monthly. The Credit Union’s objective is to establish and maintain a balance sheet and off-balance sheet structure that will protect and enhance the Credit Union’s net interest income and the value of the Credit Union’s capital during all phases of the interest rate cycle and varying economic conditions. The carrying values of interest sensitive assets and liabilities and the notional amount of swaps and other derivative financial instruments used to manage interest rate risk are presented below in the periods in which they next reprice to market rates or mature, and are summed to show the interest rate sensitivity gap. Loans are adjusted for prepayment estimates which reflect expected repayments on other than contractual maturity dates. The prepayment rate applied to the portfolio is based on experience and current economic conditions. The average rates presented represent the weighted average effective yield based on the earlier of contractual repricing or maturity dates. Further information related to the derivative financial instruments used to manage interest rate risk is included in note 10.

,

(thousands of Canadian dollars) h

y

v y

n

Cash and cash equivalents 404,537 - - - - 404,537 Yield 1.15% - - - - 1.15% Investments - other loans and receivables - 273,201 428,346 - 3,909 705,456 Yield - 1.39% 2.00% - - 1.75% Loans to Members 2,995,206 1,080,085 3,283,254 17,030 95,101 7,470,676 Yield 3.91% 4.27% 3.94% 5.11% - 3.92% Derivative financial assets 22,816 - - - - 22,816 Yield - - - - - - Investments available for sale - - - - 48,983 48,983 Yield - - - - - - Other assets - - - - 92,957 92,957 Yield - - - - - -

3,422,559 1,353,286 3,711,600 17,030 240,950 8,745,425

b y Members’ deposits 2,073,593 1,594,468 2,626,447 24 873,620 7,168,152 Yield 1.10% 2.45% 2.45% 2.45% - 1.78% Borrowings - - - - 1,761 1,761 Yield - - - - - - Payables and other liabilities - - - - 42,106 42,106 Yield - - - - - - Mortgage securitization liabilities - 58,031 907,617 - - 965,648 Yield - 2.24% 2.02% - - 2.03% Derivative financial liabilities 101 - - - - 101 Yield - - - - - - Other liabilities and Members’ equity - - - - 567,657 567,657 Yield - - - - - -

y 2,073,694 1,652,499 3,534,064 24 1,485,144 8,745,425

v y i 1,348,865 (299,213) 177,536 17,006 (1,244,194) -

80



31.2 k t k n (b) Foreign currency risk Foreign currency risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in foreign currency exchange rates. The Credit Union is exposed to foreign currency risk as a result of its Members’ activities in foreign currency denominated deposits and cash transactions. The Credit Union’s foreign currency risk is subject to formal risk management controls and is managed in accordance with the framework of policies and limits approved by the Board. These policies and limits are designed to ensure, among other things, that the Credit Union is in full adherence to the regulatory requirements prescribed in the Act as well as DICO’s standards of Sound Business and Financial Practices. The Board receives regular reports on risk exposures and variances from approved limits. The aforementioned activities that expose the Credit Union to foreign currency risk are measured, monitored and controlled daily to minimize the adverse impact of sudden changes in foreign currency values with respect to the Canadian dollar. U.S. dollar denominated liabilities are hedged through a combination of U.S. dollar investments and forward rate agreements to buy U.S. dollars and net exposure is limited to $1.5 million on a daily basis. The Credit Union uses forward foreign currency derivatives to neutralize its exposure to foreign exchange contracts with Members. As at December 31, 2012 and December 31, 2011, the Credit Union’s exposure to a 10% change in the foreign currency exchange rate, which is reasonably possible, is insignificant. (c) Other price risk Other price risk is the risk that the fair value on future cash flows of a financial instrument will fluctuate because of changes in market prices other than those arising from interest rate risk or foreign currency risk. The Credit Union is exposed to other price risk in its own investment portfolio. The Credit Union adheres to the principles of quality and risk diversification in its investment practices. The Credit Union’s other price risk is subject to extensive risk management controls and is managed within the framework of policies and limits approved by the Board. These policies and limits assist in ensuring, among other things, that the Credit Union is in full adherence to the regulatory requirements prescribed in the Act as well as DICO’s standards of Sound Business and Financial Practices. The Board receives regular reports on risk exposures and performance against approved limits. As at December 31, 2012 and December 31, 2011, the Credit Union has limited investments subject to other price risk and this exposure is insignificant.

31.3 k

Liquidity risk arises in the course of managing the Credit Union’s financial assets and financial liabilities. It is the risk that the Credit Union is unable to meet its financial obligations in a timely manner and at reasonable prices. The Credit Union’s liquidity risk management strategies seek to maintain sufficient liquid financial resources to continually fund our consolidated balance sheet under both normal and stressed market environments. The Credit Union’s liquidity risk is subject to formal risk management controls and is managed within the framework of policies and limits approved by the Board. These policies and limits assist in ensuring, among other things, that the Credit Union is in full adherence to the regulatory requirements prescribed in the Act as well as DICO’s standards of Sound Business and Financial Practices. The Board receives regular reports on risk exposures and performance against approved limits. ALCO provides management oversight of liquidity risk through its monthly meetings. The key elements of the Credit Union’s liquidity risk management framework include:

i. limits on the sources, quality and amount of liquid assets to meet normal operational requirements, regulatory requirements and contingency funding;

ii. a methodology to achieve an acceptable yield on the operating liquidity investment portfolio within prudent risk management bounds;

iii. prudence tests of quality and diversity where investments bear credit risk; iv. parameters to limit term extension risk; v. implementation of deposit concentration limits in order to assist in ensuring diversification and stability of deposit

funding; and vi. requirements for adequate measuring, monitoring and reporting on risk position and exposure management.

Under DICO regulations, the Credit Union will establish and maintain prudent levels and forms of liquidity that are sufficient to meet its cash flow needs, including depositor withdrawals and all other obligations as they come due. The operating liquidity ratio measures the Credit Union’s cash and cash equivalents as a percentage of Members’ deposits and specified borrowings. The Credit Union targets to maintain operating liquidity within the range of 7.75% to 15%. The low end of the range has been established in order to maintain a comfortable cushion beyond the statutory minimum requirements in order to meet liquidity needs, even during periods of market volatility. A cap has been placed on the range in recognition of the fact that too much excess liquidity has a negative impact on earnings. As at December 31, 2012, the Credit Union’s liquidity ratio was 13.88% (2011 – 13.70%).

82



31.3 i k The table below sets out the period in which the Credit Union’s non-derivative financial assets and financial liabilities will mature and be eligible for renegotiation or withdrawal. These cash flows are not discounted and include both the contractual cash flows pertaining to the Credit Union’s consolidated balance sheet assets and liabilities and the future contractual cash flows that they will generate. In the case of loans, the table reflects adjustments to the contractual cash flows for prepayment estimates, which reflect expected repayments on other than contractual maturity dates. The prepayment rate applied to the portfolio is based on experience and current economic conditions. In addition to the cash flows detailed below, the Credit Union is exposed to potential cash outflows in the form of commitments and contingencies, as set out in note 29.


y

y N

Cash and cash equivalents 404,537 - - - - - 404,537 Receivables 3,228 - - - - - 3,228 Current income taxes receivable - 1,455 - - - - 1,455 Investments - other loans and receivables 39,628 256,025 340,017 90,158 - 1,167 726,995 Loans to Members 558,766 2,509,325 2,569,720 2,420,475 9,998 - 8,068,284 Investments available for sale - - - - - 48,983 48,983

1,006,159 2,766,805 2,909,737 2,510,633 9,998 50,150 9,253,482

Members’ deposits 2,976,285 1,601,999 2,499,544 257,003 25 - 7,334,856 Payables and other liabilities 60,017 - - - - 240 60,257 Mortgage securitization liabilities 3,674 71,691 291,316 661,802 1,791 - 1,030,274

i b 3,039,976 1,673,690 2,790,860 918,805 1,816 240 8,425,387

,

(thousands of Canadian dollars) n

m

n v

y

c

Cash and cash equivalents 389,486 - - - - - 389,486 Receivables 2,927 - - - - - 2,927 Current income taxes receivable - 1,494 - - - - 1,494 Investments - other loans and receivables 23,169 328,879 165,669 169,120 - 1,167 688,004 Loans to Members 391,564 1,866,388 2,028,935 2,931,535 15,960 - 7,234,382 Investments available for sale - 50 - - - 41,414 41,464

807,146 2,196,811 2,194,604 3,100,655 15,960 42,581 8,357,757

Members’ deposits 3,097,303 1,383,152 1,826,204 468,831 1,138 - 6,776,628 Payables and other liabilities 52,031 - - - - 3,497 55,528 Mortgage securitization liabilities 1,242 33,010 178,051 494,752 5 - 707,060

i b 3,150,576 1,416,162 2,004,255 963,583 1,143 3,497 7,539,216

83



31.3 i k

The table below sets out the undiscounted contractual cash flows of the Credit Union’s derivative financial assets and liabilities:

,


t

y

Equity index-linked options 5 6,645 14,183 2,100 - 22,933 Gross-settled forward exchange contracts: Outflow (942) (7,104) (4,118) - - (12,164) Inflow 944 7,118 4,126 - - 12,188

7 6,659 14,191 2,100 - 22,957

,


t

y

y Equity index-linked options 59 394 15,461 5,521 56 Gross-settled forward exchange contracts: Outflow (473) (6,306) (2,138) - - Inflow 473 6,316 2,142 - -

59 404 15,465 5,521 56

Derivative financial assets and liabilities reflect interest rate swaps that will be settled on a net basis and forward exchange contracts and index-linked equity options that will be settled on a gross basis (see note 10). The gross inflows/(outflows) disclosed in the previous table represent the contractual undiscounted cash flows relating to derivative financial assets and liabilities held for risk management purposes and which are usually not closed out before contractual maturity. The future cash flows on derivative instruments may differ from the amount in the above table as interest rates, exchange rate and equity market indices change. Cash outflows relating to the embedded written option in equity index-linked deposits are included with Members’ deposits in the previous table for non-derivative financial assets and liabilities.

31.4 v i n

The following table represents the fair values of the Credit Union’s financial assets and financial liabilities for each classification of financial instruments. The fair values for short-term financial assets and financial liabilities approximate carrying value. These include accrued interest receivable, accounts payable, accrued liabilities and accrued interest payable. The fair values disclosed do not include the value of assets that are not considered financial instruments. While the fair value amounts are intended to represent estimates of the amounts at which these instruments could be exchanged in a current transaction between willing parties, many of the Credit Union’s financial instruments lack an available trading market. Consequently, the fair values presented are estimates derived using present value and other valuation techniques and may not be indicative of the net realizable values. Due to the judgment used in applying a wide range of acceptable valuation techniques and estimates in calculating fair value amounts, fair values are not necessarily comparable among financial institutions. The calculation of estimated fair values is based on market conditions at a specific point in time and may not be reflective of future fair values.

84



31.4 v i n Fair values are determined based on a three level fair value hierarchy that reflects the significance of the inputs used in making the measurements. The levels of the hierarchy are as follow:

i. Level 1 - Unadjusted quoted prices in active markets for identical financial assets and financial liabilities; ii. Level 2 - Inputs other than quoted prices that are observable for the financial asset or financial liability either

directly or indirectly; iii. Level 3 - Inputs that are not based on observable market data.

The following table illustrates the classification of the Credit Union’s financial instruments within the fair value hierarchy.

n nc i v c 0

(thousands of Canadian dollars) v v

Cash and cash equivalents 259,734 130,873 - 390,607

Derivative financial assets - 22,816 - 22,816

Investments available for sale - 27,900 - 27,900

Total 259,734 181,589 - 441,323

0


Embedded derivatives in index-linked deposits - 22,431 - 22,431

Derivative financial liabilities - 101 - 101

Total - 22,532 - 22,532

i n r u

(thousands of Canadian dollars) v

Cash and cash equivalents 189,610 199,876 - 389,486

Derivative financial assets - 21,089 - 21,089

Investments available for sale - 20,331 - 20,331

Total 189,610 241,296 - 430,906

v

(thousands of Canadian dollars) t

Embedded derivatives in index-linked deposits - 20,806 - 20,806

Derivative financial liabilities - 51 - 51

Total - 20,857 - 20,857

There have been no transfers between level 1 and level 2 of the fair value hierarchy during the year.

86



31.5

The Credit Union maintains policies and procedures relative to capital management so as to ensure the capital levels are sufficient to cover risks inherent in the business. The Credit Union’s objectives when managing capital are: (i) to ensure that the quantity, quality and composition of capital needed reflects the inherent risks of the entity and to

support the current and planned operations and portfolio growth; (ii) to provide a safety net for the variety of risks to which the entity is exposed in the conduct of its business and to

overcome the losses from unexpected difficulties either in earnings or in asset values; (iii) to provide a basis for confidence among Members, depositors, creditors and Regulatory agencies; (iv) to form a solid foundation for business expansion and ongoing reinvestment in business capabilities, including

technology and process automation and enhancement; and (v) to establish a capital management policy for the entity appropriate for current legal and economic conditions, including

compliance with regulatory requirements and with DICO’s standards of Sound Business and Financial Practices. The Act requires credit unions to maintain minimum regulatory capital, as defined by the Act. Regulatory capital is calculated as a percentage of total assets, and of risk weighted assets. Risk weighted assets are calculated by applying risk weighted percentages, as prescribed by the Act, to various asset categories, operational and interest rate risk criteria. The prescribed risk weights are dependent on the degree of risk inherent in the asset. Tier 1 capital, otherwise known as core capital, is the highest quality. It is comprised of retained earnings, contributed surplus, Members’ capital accounts, and Member entitlements with the exception of the series 96 Class A shares. Of the “50th Anniversary”, series 98, series 01 and series 09 Class A shares that have been included within Members’ capital accounts, only 90% are allowable as Tier 1 capital due to specific features of these shares. Tier 1 capital as at December 31, 2012 was $480,475,718 (2011 - $457,466,929). Tier 2 capital, otherwise known as supplementary capital, contributes to the overall strength of a financial institution as a going concern, but is of a lesser quality than Tier 1 capital relative to both permanence and freedom from charges. It is comprised of the series 96 Class A shares and the 10% portion of the “50th Anniversary”, series 98, series 01 and series 09 Class A shares that are not admissible as Tier 1 capital. It also includes the eligible portion of the total collective allowance for credit losses less the balance of various adjustments related to the merger of HEPCOE Credit Union and Niagara Credit Union and adjustments related to the amalgamation of DCU and Meridian. Tier 2 capital as at December 31, 2012 was $70,865,940 (2011 - $65,671,322). The Act requires credit unions to maintain a minimum capital ratio of 4% and a risk weighted capital ratio of 8%. The Credit Union has a stated policy that it will maintain at all times capital equal to the minimum required by the Act plus a prudent cushion. The current minimum ratios per Board policy are a capital ratio of 6% and a risk weighted capital ratio of 9%. The Credit Union’s internal policy also dictates that the ratio of Tier 1 capital to total capital will be a minimum of 60%. These internal limits are increased by the Board in tandem with significant increasing risk detected in the economic environment of the Credit Union. The Credit Union is in compliance with the Act as indicated by the table below:

R y v R k

(thousands of Canadian dollars) n m c

0 551,342 4.00% 6.37% 8.00% 12.80%

0 523,138 4.00% 6.82% 8.00% 13.12%

t

On January 17, 2013 the Credit Union announced plans for curtailment of its first contributory defined benefit pension plan (refer to note 23) effective December 31, 2014. Members of this pension plan will continue to accrue service under the plan until December 31, 2014 at which time they will become members of Meridian’s defined contribution pension plan. At the time of making this announcement, Meridian will recognize a curtailment gain of $5,701,000 in profit and loss and a corresponding reduction in pension obligations as a result of adjusting assumptions about future service and salary increases.

87


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88

Credit & Investment Karl Wettstein - Chair

Mark Kraemer

Richard Owen

Colleen Sidford

Nominating Kevin Thompson – Chair

Ross Lamont

Karl Wettstein

Helen Young

2012 Annual Report Meridian Team

Executive Leadership Team and Officers Sean Jackson – Chief Executive Officer (on Leave) *

Bill Maurin – Chief Financial Officer and Acting Chief Executive Officer *

Gary Genik – Chief Information Officer

Jennifer Rowe – Chief Marketing Officer

Bill Whyte – Chief Member Services Officer

Sheryl Wherry – Corporate Secretary *

* Credit Union Officer

Board of Directors (as at December 31, 2012) Don Ariss – Chair *

Jim Barr

Alan Caslin

Gary Cerantola

Mark Kraemer

Ross Lamont

John Murphy

Richard Owen

Colleen Sidford

Kevin Thompson – Vice Chair

Karl Wettstein

Helen Young

Audit Richard Owen - Chair

Alan Caslin

Gary Cerantola

Mark Kraemer

Helen Young

Governance Don Ariss - Chair

Ross Lamont

Colleen Sidford

Kevin Thompson

Human Resources John Murphy - Chair

Don Ariss

Jim Barr

Kevin Thompson

The Meridian Team

89

2012 Annual Report Meridian Locations

* Contact Centre was relocated September 15, 2012 from 777 Bay St., College Park, 25th Floor, Toronto, ON M5G 2C8.

Fonthill Branch 1401 Pelham St., PO Box 860 Fonthill, ON L0S 1E0

Fort Erie Branch 450 Garrison Rd., Unit 14 Fort Erie, ON L2A 1N2

Grantham Plaza Branch Grantham Plaza, 400 Scott St. St. Catharines, ON L2M 3W4

Grimsby Branch Orchardview Plaza, 155 Main St. E. Grimsby, ON L3M 1P2

Hanover Branch 255 10th St. Hanover, ON N4N 1P1

Hydro Place Branch 700 University Ave., Shopping Concourse Toronto, ON M5G 1Z5

Jackson Square Branch 2 King St. W. Hamilton, ON L8P 1A1

Kalar & McLeod Branch 7107 Kalar Rd. Niagara Falls, ON L2H 3J6

Kincardine Branch 818 Durham St. Kincardine, ON N2Z 3B9

King Street Branch 106 King St. St. Catharines, ON L2R 3H8

Kipling Branch 800 Kipling Ave., Unit 6 Toronto, ON M8Z 5G5

Lake Street Branch 531 Lake St. St. Catharines, ON L2N 4H6

Morningside Branch 797 Milner Ave., Unit 100 Toronto, ON M1B 3C3

Nanticoke Branch 34 Haldimand Road 55 Nanticoke, ON N0A 1L0

Niagara-on-the-Lake Branch 1567 Niagara Stone Rd. Virgil, ON L0S 1T0

Orangeville Branch 190 Broadway, Suite 1 Orangeville, ON L9W 1K3

Orillia Branch 73 Mississaga St. E. Orillia, ON L3V 1V4

Ouellette Avenue Branch 545 Ouellette Ave. Windsor, ON N9A 4J3

Owen Sound Branch 1594 16th Ave. E. Owen Sound, ON N4K 5N3

Owen Sound Downtown Branch 825 2nd Ave. E., Box 182 Owen Sound, ON N4K 5P3

Pembroke Branch 40 Pembroke St. W., Box 216 Pembroke, ON K8A 6X3

Pendale Plaza Branch Pendale Plaza, 210 Glendale Ave. St. Catharines, ON L2T 3Y6

Penetanguishene Branch 7 Poyntz St. Penetanguishene, ON L9M 1M3

Pickering Branch 1550 Kingston Rd., Unit 25 Pickering, ON L1V 1C3

Pickering Satellite Branch Main Security Building #P19 1675 Montgomery Park Rd Pickering ON L1V 2R5 (Bank at work branch - no public access)

Port Colborne Branch 43 Clarence St. W. Port Colborne, ON L3K 3G1

Port Elgin Branch 626 Goderich St., PO Box 730 Port Elgin, ON N0H 2C0

Portage Branch 4780 Portage Rd. Niagara Falls, ON L2E 6A8

Richmond Hill Branch 9050 Yonge St. Richmond Hill, ON L4C 9S6

Ridley Plaza Branch Ridley Square Plaza, 111 Fourth Ave. St. Catharines, ON L2S 3P5

Seaforth Branch 49 Main St. S., PO BOX 55 Seaforth, ON N0K 1W0

Speedvale Branch 200 Speedvale Ave. W. Guelph, ON N1H 1C3

St. Clair Avenue East Branch 26 St. Clair Ave. E. Toronto, ON M4T 1L7

St. Marys Branch 134 Queen St. St.Marys, ON N4X 1A9

Stevensville Branch 2763 Stevensville Rd. Stevensville, ON L0S 1S0

Stone Square Branch 370 Stone Rd. W. Guelph, ON N1G 4V9

Sunnybrook Branch Sunnybrook Health Sciences Centre, 2075 Bayview Ave., Room CB02 Toronto, ON M4N 3M5

Vineland Branch 3370 King St. Vineland, ON L0R 2C0

Wainfleet Branch 31885 Hwy #3, PO Box 165 Wainfleet, ON L0S 1V0

Walkerton Branch 244 Durham St., Box 308 Walkerton, ON N0G 2V0

Welland Branch 610 Niagara St. N. Welland, ON L3C 1L8

Wellesley (Queen’s Park) Branch 56 Wellesley St. W., Suite 103 Toronto, ON M5S 2S3

Wellington Road Branch 555 Wellington Rd., Unit 2 London, ON N6C 4R3

Whitby Branch 4061 Thickson Rd. N. Whitby, ON L1R 2X3

Woodstock Branch 396 Dundas St. E. Woodstock, ON N4S 1B7

Wyndam Street Branch 153 Wyndham St. N. Guelph, ON N1H 4E9

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contents...every year we conduct a formal de-briefing of the orientation session so as to capture...

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