to invest for the future, and what financial solutions …...of our pre-tax earnings in money, time,...

22013 Annual Report | Contents

Our Story ...............................................................................................................3

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

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

Meridian’s Commitment to Communities .................................................... 7

Corporate Highlights..........................................................................................9

Financial Highlights ........................................................................................... 11

Corporate Governance Report ..................................................................... 12

Management Discussion & Analysis ........................................................... 19

Core Business & Strategy ..................................................................20

Key Performance Drivers ................................................................... 21

Capability to Deliver Results ...............................................................22

Financial Results & Outlook ................................................................24

Risk Management ...............................................................................33

Capital Management ..........................................................................43

2014 Outlook ........................................................................................44

Consolidated Financial Statements .............................................................45

Index to the Consolidated Financial Statements ............................45

Independent Auditor’s Report ...........................................................46

Consolidated Balance Sheet .............................................................47

Consolidated Statement of Comprehensive Income ...................48

Consolidated Statement of Changes in Equity ..............................49

Consolidated Statement of Cash Flows ..........................................50

Notes to the Consolidated Financial Statements ........................... 51

The Meridian Team ........................................................................................ 105

Meridian Locations ......................................................................................... 106

Contents

32013 Annual Report | Our Story

Meridian is Ontario’s largest credit union, helping more than a quarter of a million Members grow their lives and businesses.

As a credit union, we are 100 percent owned by our Members. We work only for them, with profits returned to our Members in the form of the best products and services we can offer. We’re not motivated by short term profit objectives the way publicly traded organizations are. Rather, we take a long term view and act in the best interests of our Members and the communities they live in.

We get to know our Members so that we can proactively advise them on ways to save money, how

to invest for the future, and what financial solutions are in their best interest. We believe financial well-being is a key ingredient to overall well-being.

Our Members know that we have their backs. Our employees—more than 1,300 in our 64 branches, 7 Commercial Business Centres and 2 corporate offices—have the ability and power to make decisions on the spot, because they know our Members and their circumstances best.

Meridian combines exceptional Member service with a full range of products and services such as telephone, mobile, and online electronic banking services that allow our Members to securely access their money anywhere, anytime.

Our Story

42013 Annual Report | Message from the Chair

In 2013, we supported hundreds of local projects through donations and sponsorships. We encouraged our employees who volunteered more than 14,000 hours during work and another 40,000 hours during evenings and weekends to improve the communities they live in. We raised money for worthwhile causes such as our 2013 United Way campaign that raised $203,000. All of these activities bring to life Meridian’s commitment to improve the communities we live in.

In one of our signature achievements of 2013, these and similar activities have been brought together under Meridian’s Commitment to Communities, our new corporate social responsibility strategy approved by the Board.

We are committed to investing at least 4 percent of Meridian’s annual pre-tax earnings to make the communities we live in prosperous and resilient. We will also focus our time, energy, and resources in areas where we believe we can make the greatest difference in improving the communities we live in. This includes our leadership and proud support of a strong co-operative sector. For example, in 2013, we joined more than 30 other Ontario credit unions to fund the Ontario Awareness campaign to promote credit unions and the advantages they offer as a viable alternative to publicly traded financial institutions.

The Board continued to lead in other ways. We reinforced our commitment to Board diversity and continuous learning through director development initiatives.

We formed a dedicated Risk Committee of the Board to help maintain high standards of corporate governance by staying at the forefront of emerging issues in the rapidly changing financial services and co-operative sector.

The Board also launched a search for a new President and Chief Executive Officer to replace Sean Jackson, who began a medical leave in September, 2012. Sean recognized that Meridian cannot wait indefinitely for his return and agrees that Meridian needs to move forward with a new leader. It is the desire of both Sean and the Board that he will continue to act in an advisory role to Meridian when he is ready to return in the future.

“...Meridian exists to help lives grow and this includes the lives of those living in our local communities.”

The Board recognizes and thanks Sean for his tremendous leadership in establishing and growing Meridian, and his contribution to the Canadian credit union system during his 20 years as President and CEO of Meridian and one of our legacy credit unions. The Board will formally recognize Sean at our Annual General Meeting on April 22, 2014 in Barrie.

We also recognize and thank Bill Maurin, Meridian’s Chief Financial Officer for his leadership of Meridian as Acting CEO throughout Sean’s absence. The Board continues to have full confidence in Bill’s leadership during this search period.

On behalf of the Board, I would like to offer a heartfelt thanks to all Meridian employees for their continuing commitment to helping lives grow and improving the communities we live in. Thanks also to you, our Members, for your ongoing trust in Meridian and the co-operative principles we follow. Together, we are building an outstanding financial institution.

Don Ariss Chair, Board of Directors

Message from the Chair

52013 Annual Report | Message from the Acting CEO

When I’m asked what sets Meridian apart from other financial institutions, I always say it’s our singular focus on growing lives and improving the communities we live in. It’s at the centre of everything we do and why we exist—the essence of Our Story.

In 2013, we introduced the first year of our three-year corporate strategy focused on sustainable growth, strengthening our balance sheet by ensuring an adequate return on regulatory capital and a good balance between loan and deposit growth. As a result, assets under management increased to $10 billion in 2013, up $670 million over the previous year, helped by record net sales generated by an expanded wealth management offer.

However, we’re not focused on growth for growth’s sake. Growth is the tangible positive outcome of our efforts to grow the lives of our Members, and our focus on sustainable growth helps to ensure we have the resources to help us deliver on Our Story. The strategy focused our efforts on the following five key areas in 2013:

Delivering a Differentiated Member ExperienceBecause we’re owned by our Members and we exist to help lives grow, it’s critical for us to continuously deliver what our Members (and prospective Members) want and need. Each year an independent firm surveys Members about their Member service experience as part of our Voice of Member program. Last year, we reached out to more than 14,000 Members and the results showed a continued feeling that Meridian has its Members’ backs, and a continued increase in Membership loyality.

Your insights also helped drive and shape new products and service offerings, including WelcoME, our onboarding program to ensure new Members are fully aware of how Meridian is different and understand the full range of services and advice that we offer. WelcoME reduces the time to open an account by 75%, allowing us to spend more time getting to know our new Members and their financial needs.

“Growth is the tangible positive outcome from our efforts to grow the lives of our Members...”

Building the BrandWe told Our Story to more people than ever before in 2013, through expanded advertising, social media, and public relations campaigns. We also joined credit unions from across Ontario to encourage Ontarians to join the co-operative banking movement. The campaign, which launched in early 2014, is designed to change the perceptions and attitudes Ontarians have towards credit unions, while educating them about the many benefits of this alternative form of banking.

Expanding Member Access We’re proud to have introduced another first to the Canadian financial services market last year. Meridian, in partnership with Central One Credit Union and three Canadian credit unions, launched Deposit Anywhere, a new mobile banking application that makes it easy to deposit a cheque using your smartphone. Members have used the service to make 13,000 deposits since it was introduced last April. We continue to enhance our digital banking offerings, including giving you the ability to purchase GICs and registered products online, etransfer funds on a mobile device, and access cheque images online.

We’ve also expanded our team of mobile mortgage specialists who are available to visit Members and prospective Members when and where they want to arrange

Message from the Acting CEO

62013 Annual Report | Message from the Acting CEO

mortgages. And we’ve improved access for small business owners by rolling out a new small business banking model across our network, along with new product offers and small business banking specialists.

Creating an ownership cultureBuilding and maintaining a highly engaged culture, where employees take ownership of their actions and keep our Members at the centre of everything we do, is critical to our success. We continue to invest in training and development programs that embed ownership into Meridian’s

culture, develop our employees’ strengths, and reward innovation. Last year our efforts were recognized with The Achievers 50 Most Engaged Workplaces in Canada. This annual award recognizes top employers who display leadership and innovation in engaging their workplaces.

Technology and Information ManagementWe continue to invest in technology that enables ongoing improvements in Member service and access.

We have another busy year planned at Meridian in 2014. We’ll

continue our focus on helping lives grow by delivering the products and services that make a difference in our Members’ lives.

On behalf of all Meridian employees, thank you for your ongoing support and Membership in Meridian.

Bill Maurin Acting Chief Executive Officer Chief Financial Officer

72013 Annual Report | Meridian’s Commitment to Communities

Meridian’s Commitment to CommunitiesOne of the many ways we help lives grow is through our Commitment to Communities, which brings together the many activities in which Meridian and our employees are involved, to make the communities we live in prosperous and resilient.

As part of our commitment, we will invest at least 4% of our pre-tax earnings in money, time, and talent in Meridian communities, following international standard London Benchmarking Group guidelines. In 2014, this investment will total $1.9 million.

We will also focus our efforts in five areas where we believe we can make the most significant difference, specifically:

1. Improve financial literacy with a special focus on local entrepreneurs who will create jobs and future opportunities. We are currently working with MaRS (Medical and Research Sciences), the Toronto-based research facility and business incubator, on research that will involve local Ontario research and innovation centres across the province, including the communities we live in.

2. Invest in local organizations, businesses, and activities that make our communities strong. In addition to donations and sponsorships of local organizations, we advise, support, and make investments in businesses in our community every day through our small business program and seven Commercial Business Centres across the province.

3. Support our employees, ensuring that they lead healthy, safe, and balanced lives; benefit from and take ownership of our success; and

are supported in donating their time, skills, and resources to their community. Employees currently receive three paid days off every year to take as wellness days or volunteer for organizations that they support. New initiatives will be launched in 2014 that will help employees leverage their support and volunteer activities to benefit local not-for-profit organizations.

4. Create a healthier environment by improving our environmental impact in the community. We have launched an in-depth review of our environmental footprint to establish a baseline against which we can measure our progress in achieving this goal.

5. Support a strong co-operative sector. In 2013, we worked with other credit unions in Canada to develop Deposit Anywhere, which allows Members to use their smartphones to deposit a cheque by emailing a photo of it. Credit unions broke new ground with this service, becoming the first financial institutions in Canada to offer it, and a number of banks have since followed suit. We also joined more than 30 other credit unions in Ontario in funding a major advertising and public relations campaign to raise awareness of the benefits of co-operative banking.

Our Commitment to Communities is local. Decisions on organizations and activities to support are made by or with the input of branch managers and employees in the communities we live in.

It is based on the co-operative values and beliefs our Members and employees share. Through it, we help build prosperous, resilient communities where Ontarians can grow their lives.

82013 Annual Report | Meridian’s Commitment to Communities

Our Commitment to Communities in Action

A boost to the economy of the Niagara Region

In 2013, we provided a $5.26 million, 25-year commitment to an arena that will become the new home of the Niagara Ice Dogs. Named the Meridian Centre, it will become a focal point for community activity; attracting visitors, new businesses, and investment that will help revitalize the city’s downtown core and boost the economy of the entire Niagara region.

CYL Summer Camp

Twelve young Members had the chance to spend a week last summer at one of the Ontario Co-operative Association’s Co-operative Young Leaders camps. The camps bring young adults between the ages of 14 and 18, from across Ontario, together, to learn about and practice communication and co-operative leadership skills.

A million-dollar milestone for United Way

Every October, a year-long planning effort by an employee-led organizing committee culminates in a month-long campaign to raise money for the United Way. In 2013, our 1,300 employees raised $203,000 through a variety of activities in every branch and both corporate offices. In the process, they pushed Meridian past a corporate milestone that we’re all proud of—we have now raised more than $1 million for the United Way since we first opened our doors in 2005.

Aid for the Philippines

When Typhoon Haiyanin hit the Philippines in 2013, bringing widespread flooding, landslides, and the destruction of thousands of homes, Meridian helped come to the rescue with a $10,000 donation to the Canadian Red Cross.

In previous years, Meridian has helped people deal with disasters by contributing to the Goderich Disaster Relief Fund to aid residents in their recovery after the 2011 tornado that devastated that community, and to the Canadian Red Cross to help relief efforts following the 2011 earthquake and tsunami in Japan, and the 2010 earthquake in Haiti.

2013 Annual Report | Corporate Governance Report 12

Meridian operates within a comprehensive regulatory framework, and is established under provincial legislation, The Credit Union and Caisses Populaires Act, 1994. Primarily, credit unions are regulated by two bodies, the Financial Services Commission of Ontario (FSCO), and the Deposit Insurance Corporation of Ontario (DICO).

The Ministry of Finance develops and establishes the legislative and regulatory framework under which credit unions must operate. FSCO ensures that credit unions operate in accordance with the requirements of the act and regulations, particularly with respect to issues involving market conduct relating to Members

and the general public. DICO oversees compliance with solvency rules, and provides deposit insurance protection, up to prescribed limits, for deposits held in Ontario credit unions and caisses populaires. As part of this responsibility, DICO has the authority to issue bylaws to ensure that insured institutions operate in accordance with sound business and financial practices. Meridian meets quarterly with DICO representatives, provides regular reporting to DICO, and participates in periodic, risk-based examinations to promote responsible governance through strength and stability.

Governing Legislation and Regulation

Approach to Governance at MeridianMeridian’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. We believe this is essential for our continued success and Members’ trust.

Meridian operates under a principles-based governance philosophy with policies and procedures built on the following key responsibilities:

• Fulfill legal and fiduciary obligations, ensuring adherence at all times to statutory and regulatory requirements.

• Act in the best interests of Meridian and the totality of the Membership.

• Continually educate Members on the role of the Board of Directors and other key governance issues, ensuring Members can effectively exercise their rights and obligations in the election process.

• Ensure the credit union has the means, capability, and willingness to direct itself prudently.

• Ensure effective stewardship of business operations and management of risk, including an effective enterprise-wide, risk management framework.

• Reflect Meridian’s commitment to integrity, open communication, teamwork, and continuous improvement.

• Continually assess the effectiveness of applying these responsibilities.

Board MandateThe Board of Directors protects and enhances Meridian’s assets in the best interests of our Members and stakeholders. To assure Members and stakeholders that all regulatory and statutory requirements are met, the Board of Directors ensures that Meridian has clear, strategic direction,

that objectives are aligned in the best interests of Meridian’s Members and stakeholders, and that Meridian’s operations are managed in a sound and prudent manner. Meridian Directors exercise independent judgment with honesty and integrity.

Corporate Governance Report


Board Composition and ElectionIn compliance with our bylaws, Meridian’s Board of Directors is composed of 12 independent Directors, nominated from the Membership, and elected for three-year terms by our Members. Each year, to maintain the highest quality Board composition, which represents a broad range of skills, experiences, and backgrounds, the Board reviews the skills, knowledge, and experience of the Directors. If any gaps exist, the Board’s Nominating Committee addresses these gaps when soliciting candidates.

The election process is comprehensive. All prospective candidates receive an extensive

package of information, which DICO recently used as the basis for a sample Director Candidate Information Guide, as released to the Ontario credit union system. All eligible candidates are then placed in nomination. The Nominating Committee interviews all candidates and evaluates them against a set of criteria pre-defined by the Board. The Nominating Committee then recommends candidates considered best qualified to serve Meridian. Nominees who are not recommended are still eligible to remain on the ballot for election. Members vote to elect Directors by casting ballots over the internet, or in person at any of our branches.

Board DiversityMeridian’s Board of Directors recently adopted a statement of intent that recognizes and embraces the benefits of diversity among Directors. A truly diverse Board of Directors will include, and make good use of, differences in skills, regional and industry experience, background, race, gender, and other attributes. Meridian considers diversity of thought, experience, and background equally important. Recommendations for candidates will be based on qualifications and the broad diversity required to represent the Members of today and tomorrow.

The diversity of the 2013 Board of Directors includes various entrepreneurial backgrounds, professional experience in large corporate business environments, and considerable experience within

the co-operative sector. The current Board also has the benefit of various professional certifications and accreditations, including Chartered Financial Analyst, Chartered Professional Accountant, Certified Management Accountant, Certified Human Resources Professional, and Certified Independent Director. Additionally, our current Directors hold various degrees, including Bachelors of Commerce, Science (Business Management and Economics; Mathematics), Law, Arts (Economics); Honours Bachelors of Arts (Political Science; Economics); and Masters of Business Administration (Wharton School of Business; Finance and Marketing), Management Operations, Leadership, Mathematics and Computer Science.

Orientation and Continuing EducationNew Directors are provided a comprehensive orientation to become familiar with Meridian’s business operations and governance processes. Every year a formal de-briefing of the orientation session is conducted 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 of Directors has an approved budget for ongoing training and development, including industry-sponsored seminars and other conferences relevant to Meridian’s business, for individual Directors, as well as educational sessions for the Board as a whole. As part of the regular Board meeting cycle in 2013, Board Members participated in several information/education sessions, including:

• Board Diversity

• Brand Equity Research Findings

• Regulatory Overview

• Governance Focused Enquiry

• How “Delivery” Delivers to our Members

• Emerging Trends in Payments Technology, conducted by Meridian’s external auditors

In late 2012, the Board established a policy objective to accredit the majority of Meridian’s Directors with external Director designations. We are pleased to note that as of the end of 2013, three Directors hold designations from either the Institute of Corporate Directors (ICD) or Director’s College (C.Dir). Additionally, two Directors are currently registered and partway through the ICD program, and two more have been authorized to take the ICD program in 2014. The Board will meet its objective once these remaining designations have been achieved.

Board EvaluationsThe Board of Directors is committed to effective governance and continuous improvement. The Governance Committee facilitates an annual evaluation process to assess the effectiveness of Board activities. Generally, external consultants conduct these evaluations. In 2013, evaluations were conducted via telephone interviews with individual

Directors, and concluded through facilitated discussion with the full Board to bring clarity to the outcomes. Actions to enhance governance practices, and opportunities for Board development, are based on recommendations arising from this process. The Governance Committee monitors progress against these actions.

Board CommitteesThe Board has delegated five committees to oversee the monitoring of policy adherence.

These committees, and their specific, primary responsibilities are outlined below:

Audit & Finance Committee• Review financial statements, internal controls,

accounting policies, and reporting procedures

• Review the credit union’s financial performance relative to established metrics

• Ensure integrity of financial reporting

• Oversee internal and external audit processes

• Monitor the independence of external auditors

• Oversee and monitor compliance with regulations and all Board policies

• Oversee the reporting relationship of the Chief Audit Executive


Governance Committee• Maintain a healthy governance culture, and oversee

all governance policies

• Assess the effectiveness of the Board, its committees, and committee chairs

• Oversee the Board’s annual planning process

• Oversee the development plans for Directors

Human Resources Committee• Oversee HR policies and programs, ensuring that

they are developed, implemented, and adhered to by management in support of the business strategies of the credit union

• Review and recommend compensation for Directors

• Review CEO performance and compensation

• Oversee employee pension plans

Nominating Committee• Oversee the nomination, assessment, and

recommendation of Board candidates

• Assess the candidate pool to ensure it addresses any identified gaps

• Oversee the election process

• Account for the general content, objectives, and guidelines of Meridian’s annual report

• Oversee the activities associated with the Annual General Meeting and any special Members meetings

Risk Committee• Ensure a robust process for identifying, managing,

and monitoring critical risks

• Ensure policy guidelines and systems are in place to ensure enterprise risks are at an acceptable level

• Provide strategic oversight to risk management policies and DICO standards

• Oversee the establishment of a risk appetite framework

• Review and approve individual, connected, and restricted party credit applications

2013 Board InitiativesThe Board believes it is important to offer a level of transparency to the Members. To that end, the Board provides Members with information on its activities.

The Board is proud of the initiatives implemented in 2013:

• Comprehensive evaluation of the Board involving individual Director interviews, peer assessment, and a fully facilitated session to discuss findings

• Establishment of a plan for developing the findings of the comprehensive Board evaluation, to continue to enhance the Board’s evolution

2013 Annual Report | Management’s Discussion & Analysis 19

R - s 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.

Ca t on ar i orward-Lo i g St t men s T i i l s n i i t

i i i i l ” “ ” “ t i “ s i i ” “ i ” n il f l “ l ” s l “ ”

f i f f i m a l l l n if l f i i i f

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This management’s discussion and analysis (“MD&A”) gives readers an overview of Meridian Credit Union (“Meridian”), and enables them to assess Meridian’s financial condition and results of operations for the fiscal year 2013, 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. The MD&A commentary is as of February 28, 2014.

Core Business & Strategy ........................................20

Corporate Overview ............................................20

Our Corporate Strategy .......................................20

Key Performance Drivers .........................................21

Capability to Deliver Results .....................................22

Financial Results & Outlook ......................................24

2013 Financial Overview ......................................24

2013 Financial Performance Review .......................26

Total Revenue .................................................26

Net Interest Income ........................................26

Provision for Credit Losses ...............................28

Credit Portfolio Quality ....................................28

Non-Interest Income from Operating Activities .........................................29

Non-Interest Income from Investments in Associates & Joint Venture ..........29

Non-Interest Expenses ....................................30

Provision for Income Taxes ...............................30

Dividends ......................................................31

Financial Conditions Review ..................................31

Balance Sheet Summary ..................................31

Liquidity Review ..............................................32

Capital Review ................................................33

Risk Management ...................................................33

Overview ...........................................................33

Enterprise Risk Management Philosophy ................34

Enterprise Risk Management Framework ................34

Identification and Management of Key Risks ...........41

Capital Management ...............................................43

Overview ...........................................................43

Capital Management Philosophy ............................43

Capital Management Framework ...........................43

Capital Management Governance ..........................43

Managing and Monitoring Capital ..........................44

2014 Outlook .........................................................44

Management’s Discussion & Analysis


Core Business & Strategy

o po a Ov rvi w

Meridian exists to grow the lives of its Members and improve the communities we live in.

As Ontario’s largest credit union, we grow lives by delivering all of the banking products and services our over 263,000 Members need through a network of 64 branches, 2 satellite offices, 7 Commercial Business Centres and 2 corporate offices.

Meridian is owned by its Members. We work only for them and always put their interests first. Our

employees take the time to understand the goals and aspirations of our Members, which then allows us to proactively offer solutions that meet their needs. Our employees are empowered to make decisions at the local branch level.

We also grow lives through a commitment to invest money, time, and talent to help build prosperous, resilient communities. Our Commitment to Communities is based on the cooperative values and beliefs our Members and employees share.

O Co por t tr t y

Meridian strives to be a Member-centric industry leader, focused on growing the lives of our Members. As a Member-owned organization, we develop our plans and strategies with the long term best interest of our Members in mind, not short term earnings objectives. Our strategic objectives focus on being true to Our Story and delivering on the following key goals:

. l D ff M x

We believe that our Member experience is what sets us apart from other financial institutions. We exist to grow the lives of our Members; because we are owned by them, they know that we have their interests in mind and will always have their back. Moving forward, we will continue to nourish and enhance this experience for all of our Members through the very best customer service, unbiased advice, and the products and services that they need to help their lives grow. Our goal is to ensure their financial well-being.

l

We know through our industry-leading loyalty and service scores that our Members truly value what we bring to them. As we strive to help grow the lives of more Ontarians, we need to build stronger awareness of who Meridian is and what we have to offer in all of the markets in which we operate. We will continue to focus on ensuring that Meridian is not the best kept secret in Ontario financial services.

x M A

In this fast changing world, we need to ensure that our Members are able to do business with us easily. Members continue to request a competitive level of convenience, with access to physical branches. Even consumers with a high propensity

for online or mobile services prefer banks with branches in close proximity.

Technology will also continue to drive the evolution of banking. As more people use their smart phones, tablets and computers to conduct most of their financial transactions, demands for “anytime, anywhere, any device” banking will grow. Our goal is to meet these demands by providing ubiquitous access to all Members through all channels.

4 s G

We seek ways to expand our business model in order to add value for our Members. Sustainability requires that we grow our Membership and deepen our relationships with Members. This enhances our earnings, which in turn fuels further value-added investments in Member products and services.

5 r Ow rs r

We pride ourselves on a culture that puts the Member at the centre of our organization and our decisions. We want to build on this culture such that each employee will feel ownership in Meridian’s success and continue to be empowered to make decisions locally.

Our Ownership Culture embodies commitment, engagement, passion, initiative, stewardship, belonging, fellowship, and pride. It is about having a deep and comprehensive understanding of Meridian and what makes us valuable to our


Members.

l I f M

We continue to be committed to enhancing our use of technology and information to better support Meridian’s Members and employees, and to achieve our strategic objectives. We ensure that

our platforms are robust and secure, and are capable of supporting emerging technologies.

We will continue to employ best-in-class IT management frameworks and leverage industry experts, and partner with credit union system peers and technology partners.

Key Perfo mance Driver

Critical to our success are our Members, our employees, and our presence in the marketplace. These ultimately drive our performance, creating a financially sound and sustainable credit union. We pay keen attention to our success factors, by listening to what our Members say, ensuring Ontarians know about us, and ensuring our employees are fully engaged.

V f

Voice of Member is our Member relations program that gives Meridian an opportunity to hear what Members have to say about us, our products, and services. It allows us to respond to Member needs and grow the lives of our Members by adding value. In so doing, we realize growth in our relationships which is the totality of our lending, deposits and wealth management balances. Growing relationships with our Members is the ultimate indicator of added value.

Meridian’s strong Member ratings increased substantially in 2013.

Aw f M

We regularly check the pulse of the people living in our communities to assess awareness of Meridian and the unique offer we bring. We monitor our progress over time, in the areas of competitive awareness, differentiated Member experience, and competitive access. These factors influence growth in Meridian’s Membership base and our ability to deliver Our Story to more Ontarians.

Our brand awareness research shows that today more Ontarians know about Meridian than before.

E l

We continuously undertake activities that ensure our employees are engaged and empowered to make decisions in the best interest of the Member, thinking like an owner. We also promote the wellbeing of our employees through our iMwell program.

A strong trend of high employee engagement, results in a greater ability to service the needs of our Members.

C l P

A key indicator of our financial soundness and ability to exist as a going concern is the strength of our capital base, which consists mainly of Member shares and retained earnings. This capital allows us to absorb shocks stemming from economic downturns and market risk, and helps protect Members’ deposits. It also dictates our ability to reinvest earnings in activities that add value to our Members. We, therefore, focus on maintaining strong capital ratios by building our capital base using high quality retained earnings that can be used in the event of a shock, or can be deployed to better meet the needs of Members.

Meridian’s capital and risk weighted capital ratio grew stronger in 2013.


C pa i ity to Deliver Results

Our strategic success is grounded by our technology, delivery network, organizational processes, and knowledgeable human resource capital. These continue to be strengthened while new capabilities are developed to enable us to meet our strategic objectives. The following 2013 successes are the building blocks for Meridian’s ability to continue to meet its strategic objectives in the years to come:

o c & e vice D iv y

ll s

Fulfilling our role to meet the needs of Members, in 2013 we launched our Small Business Banking offer, which was rolled out across our network. This offer includes:

Dedicated small business specialists Expanded products and services to include competitive chequing account

packages and the Small Business Prosper accounts A new credit lending model Enhanced internal workflow, policies, and procedures.

We also hosted a Small Business seminar for 350 entrepreneurs, providing value-based advice to assist owners with the success of their companies.

t A

We revised our service delivery model by fully integrating our Wealth Management, Mobile, Retail Branches, and Small Business teams. This realignment will enable us to better serve all of the needs of Members while providing a differentiated experience. This truly differentiates us as an organization that looks at business through the lens of what is best for our Members, instead of what is best for a product or business line manager.

f

We initiated a Business Banking Transformation program which will result in a revised Commercial banking delivery model. The new model will ensure we have adequate resources and processes to sustainably grow our Commercial relationships while managing risks. This is a significant undertaking that will build the appropriate infrastructure to enhance the Member experience and ensure employees are able to deliver on Our Story. The program’s goals include:

Increased efficiency through process improvements, centralization, and technology

Enhanced human resource management models and processes to better serve Members and enable development of our employees

Enhanced risk management and controls to ensure growth is sustainable

c a M Acc

w r

In keeping with our goal to make it more convenient for Members to do business with us, we opened three new branches in 2013.

Binbrook opened, July, 2013 Barrie, Essa Road opened, July, 2013 Newmarket opened, September, 2013

The new Binbrook and Barrie locations are consistent with our new branch design standards, which are brighter and built to facilitate Member advisory discussions. Both


branches were well received in their communities and continue to grow in Membership.

The Newmarket branch is our first cooperative banking agency which expands our Member access in an innovative way. This new delivery model is designed to be managed by an independent agent. It offers a full suite of Meridian’s products and services.

c

We launched a number of digital enhancements in 2013:

“Deposit Anywhere”, the first remote deposit cheque capture in the Ontario market

The ability to buy non-registered GICs online and registered products in January 2014

Online access to cheque images Introduction of Interac E-transfers and Member-to-Member transfers for

mobile banking

an Aw e e

A s & M

We increased our use of digital advertising and social media to drive awareness in 2013, and continued to focus our advertising on what makes Meridian different, as demonstrated in our We Have Your Back mortgage campaign.

r U O Aw

Meridian and other Ontario credit unions jointly embarked on an Ontario awareness campaign that promotes cooperative banking and showcases the credit union difference.

o mi e o o ni i

Our Commitment to Communities encapsulates our efforts to help improve the communities we live in. We support local initiatives, from grass-roots activities that help build stronger local communities, to leveraging our significant community investments such as the Meridian Centre in St. Catharines. We will enhance our local presence through the involvement of our employees in the community.

al a a men

k v t

We are proactively developing in-house talent through an in-take program for key delivery roles, which ensures that Meridian has a pool of skilled employees in the pipeline, to support our strategic objectives. Through this, Members will benefit from decreased time-to-competency as internal hires who fill vacant positions will already have an understanding of Meridian’s culture, practices, and processes. Employee engagement and retention will also improve, as internal staff will have an opportunity to grow their careers at Meridian.

O f 50 s

l k

For the fourth year in a row, Meridian was named one of Achievers 50 Most Engaged Workplaces™ in Canada. This annual award recognizes top employers that display leadership and innovation in engaging their workplaces.

Engaged employees will embody an ownership culture, making decisions that are in the best interest of Meridian and our Members.


c o gy

r r

Meridian is implementing an Enterprise Data Warehouse to improve our data management and enable us to glean better operational and financial insight. This will in turn, enable us to better meet the needs of our Members.

c M y

As we always diligently look for ways to better protect our Members, we have made an investment to further enhance our fraud management program, through the implementation of a new fraud management system with improved fraud detection and prevention capabilities.

Financial Result & Ou look

0 3 Fin nci Ove view

Economic activity in Canada was relatively weak in 2013 as businesses continued to delay investment while household spending supported growth. The Canadian dollar remained strong for most of the year before weakening at the end of 2013. The Bank of Canada held its policy interest rates fixed at historically low levels as economic growth was slower than expected while inflation was stubbornly low. In Ontario, demand was weak in all sectors of the economy; government, businesses, and households. The housing market slowed with sales of existing homes holding strong, but housing starts declining. The spring home buying season was slow as consumers digested policies aimed at curbing household debt. In the second half of the year, purchases of existing homes picked up due to fears of potentially rising mortgage rates.

Despite the weak economic conditions, which resulted in a more competitive environment, particularly for Commercial relationships and deposits on the whole, Meridian’s operational results remained strong. Total assets grew by $438.3 million to $9.2 billion at the end of 2013. The majority of this was attributable to an increase in the mortgage portfolio. Assets under management, which include off-balance sheet wealth management assets, rose by $670.3 million to $10.2 billion. Growth in wealth assets was exceptionally strong, reflecting increased net sales of mutual funds and market appreciation in the value of wealth products. Growth in deposits was slightly weaker than in 2012 due to competition among financial institutions.

Overall, Meridian’s 2013 operations generated pre-tax income of $59.4 million, an increase of $34.3 million

over restated 20121 pre-tax earnings. This resulted in an after-tax return on equity (“ROE”) of 10.3% compared to a restated2 ROE of 4.6% realized in 2012. Total revenue net of provisions for credit losses was $30.5 million or 16.8% higher in 2013. The primary driver for this increase was a reduction in provision for credit loss from $34.2 million in 2012 to $6.5 million in 2013. In 2012, Commercial loan losses were comprised of a relatively small number of large losses. In particular, two individually significant impairments contributed to the high credit losses. Net interest income, which is the difference between the income that is generated by Meridian’s assets and the cost to attract Member deposits and other borrowings, grew by $5.3 million or 3.1% from the previous year, despite continued margin compression. Non-interest income fell by $2.5 million largely on account of lower profits from Meridian’s investment in the CUCO Cooperative Association. Operating expenses were $3.7 million or 2.4% lower in 2013, attributable largely to a pension plan curtailment gain of $5.7 million, amortization adjustments and expense reductions in certain expense categories which were offset by increases in others. The lower expenses and higher revenue resulted in an improvement in Meridian’s efficiency ratio which declined to 72.1% from 86.2% in 2012. Much of this improvement was driven by the one-time curtailment gain. The efficiency ratio is a measure of productivity. It is calculated as non-interest expense divided by total revenues, expressed as a percentage.

1 2012 results have been restated on account of a correction to the actuarial valuation of

the 2012 pension plan curtailment gain, a change in the method of amortization of secur tizat on fees and the implementation of changes in accounting standards (IAS 19) that affect employee benefits .

After-tax ROE was also restated as a result of a revision in accounting standards affecting presentation of the tax benef t on deductible dividend payments.


n v / n

($ millions) Change ($ millions) Change (in basis points)

2012 % 2012 % 2012 Change

Cash and cash equivalents 1.1 231.6 46.8

Investments 14.1 748.5 188.4 )

Loans 99.0 1,842.1 537.4 )

Lines of credit 49.5 1,224.1 404.1 )

Mortgages 4 143.2 4,041.4 4 354.4 )

Other assets 103.3

Interest income / total assets 306.9 4 4 8,191.0 374.7 4)

Demands 23.3 2,938.4 4 79.4 4 )

Fixed terms 93.3 4, 4 3,782.2 246.7 4 4)

Borrowings 16.5 786.6 208.9

Other liabilities 161.4

Interest expense / total liabilities 133.1 7 7,668.6 7 173.5 )

Members’ equity 522.3 7

Total liabilities and Members’ equity 133.1 7 7 4 8,190.9 162.5 )

Total 7 7 )

Despite significant market competition for deposit money, Meridian’s 18-month GIC offer encouraged Members to lock in some of their demand funds, increased fixed terms as a percentage of the deposit portfolio, and contributed to the 7.4% growth in total average deposits from the prior year.

Meridian continued to securitize residential mortgages throughout 2013, to help fund sustainable growth. Included in interest income from operating activities is $33.9 million of interest income on mortgages which had been securitized, an increase of $7.3 million from 2012. 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, from 2012, by $5.3 million or 31.6% to $22 million, largely due to incremental issuances of $209.5 million. Although the mortgage securitization liability has grown 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. In June of 2013 Meridian secured a $300 million credit facility with a Schedule 1 bank to ensure cost effective funding is

available to support future expected growth and ensure that sufficient contingency funding exits to address liquidity shortfalls in emergency situations.

Net interest income is impacted by fluctuations in capital markets above and beyond what we consider to be our normal operating activities. As circumstances warrant, we undertake hedging activities, which may include the purchase of derivative instruments to protect Meridian and its Members from changes in external market conditions. These hedging activities, in turn, generate their own net interest income or loss, countering the impact on the underlying item.

In November, Meridian executed a bond forward hedging strategy to lock in the cost of funds for the December securitization transaction. This strategy was effective in reducing the overall cost of funds of this issuance. In addition, Meridian executed $100 million of notional 5-year pay fixed interest rate swaps. The notional amounts of our derivatives represent the amount to which rate or price is applied in order to calculate the amount of cash that must be exchanged under the contract. Notional amounts do not represent assets or liabilities and therefore are not recorded in our consolidated balance sheet. The fair value of over-the-counter (OTC) derivative contracts is recorded in our consolidated balance sheet as well as the interest income or expense associated with quarterly cash settlements.


ov o

The provision for credit losses (PCL) was $6.5 million in the current year, down from $34.2 million in 2012. The PCL for the Commercial loan portfolio was $4.7 million ($31.9 million in 2012) and $1.8 million was attributable to the Retail loan portfolio ($2.3 million in 2012). Commercial losses are comprised of a relatively small number of larger, and sometimes individually significant, losses. This results in volatility from year to year, and can lead to significant variances from plan levels which are largely determined based on average historical loss rates. Two individually

significant impairments in 2012 contributed to record-high credit losses that year. During 2013, corporate restructuring and assignment of new security resulted in improved conditions for two large previously impaired accounts and the ultimate reversal of $5.5 million of credit losses in these accounts. The $4.7 million PCL for the Commercial portfolio in 2013 is net of these reversals. The PCL represents 0.08% of the total loan portfolio in 2013. Commercial PCL is 0.20% of the Commercial loan portfolio and the Retail PCL represents 0.03% of the respective portfolio.

d o f l l y

Loan loss provisioning is determined in accordance with an established policy. Management reviews the loan allowance position monthly with a focus on updated forecasts for watchlist accounts, impairment levels, and expected net credit losses. Provisioning is adjusted where necessary to ensure compliance with policies, and to include management’s best estimate of losses based on currently available information.

Gross impaired loans decreased from $142.9 million in 2012, to $84.7 million in 2013, representing 1.05% of the total loan portfolio. The total allowance for impaired loans, at $37.8 million, has decreased by $7.7 million over the prior year, resulting from $14.2 million in write-offs and recoveries offset by $6.5 million in net new impairment. Due to the high exposure levels and nature of security on many of the Commercial impairments, impaired accounts can take in excess of a year or two to close. Several large Commercial impairments from previous years remain on the books at year-end, resulting in an allowance significantly higher than the current year’s PCL.

y v

($ millions) Total loans, December 31 8,100.7 7,470.7 Gross impaired loans (“GIL”), December 31

84.7 142.9

Total allowance for impaired loans, December 31

37.8 45.6

Provision for credit losses (“PCL”)

6.5 34.2

GIL as % of total loans 1.05% 1.91%

GIL as % of Members’ equity 14.54% 27.13% Total allowance as % of total loans 0.47% 0.61%

PCL as % of total loans 0.08% 0.46%

% Better than average 15.9% 42.9%

% Average 65.1% 41.7%

81.0% 84.6%

Of the total allowance, $21.8 million is attributable to specific impairments, with the remaining $16.0 million attributable to collective reserves. The collective allowance estimates incurred losses in the existing credit portfolio that cannot yet be identified on an individual loan basis. The total loan allowance as a ratio to total loans was 0.47% in 2013. The improvement of 0.14% over 2012 is a direct result of the favourable loss experience in the current year.

Although Meridian’s credit risk policies and methodologies have not changed materially from the prior year, we continue to further enhance our risk management processes. Implementation of the new Commercial risk rating model introduced in November 2012 was completed. The new model is more comprehensive than its predecessor and resulted in the risk rating scale being expanded from six to nine ratings. It is premised on a more in-depth 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 Commercial loan portfolio, stratified by risk rating, is reviewed monthly. During 2013, the entire Commercial loan portfolio was reviewed and rated using the new model. This resulted in a shift between rating groups as observed in the table above. The shift is the result of re-aligning the portfolio to a more robust rating system, and not because of any deterioration in the quality of the portfolio. Most of the portfolio continues to fall into the combined “better than average” and “average” categories. Collectively, these two ratings account for approximately 81.0% of the total Commercial portfolio versus 84.6% the previous year. During 2013, the Early Warning System was developed for Commercial accounts. This comprehensive system considers 17 metrics in a monthly assessment that will identify accounts where there may be indicators of increased risk. This will allow for more timely identification of accounts that require follow up, additional attention through the adjudication process, or an increase in risk


rating to Watchlist status, with the objective of correcting issues that may otherwise result in future impairment of the account. The system is being piloted and will be rolled out in 2014.

In 2012, Meridian initiated a multi-year Business Banking Transformation Project with the objectives of enhancing portfolio credit management practices and improving Member experience through new automated processes and other techniques. Developments are

underway to establish a target operating model for Commercial lending, and to expand and enhance the Commercial lending portfolio analytics and reporting systems. The result will be more robust processes and risk management practices appropriate for the ongoing growth in volume and complexity of Meridian’s Commercial loan portfolio. Enhancements to credit risk management processes as noted above, along with tightening of underwriting practices, are integral components of this transformation project.

N O A v

Non-interest income from operations decreased by $0.1 million or 0.3% to $36.7 million in 2013 compared to 2012. This performance is largely attributable to a reduction in Commercial loan application fee income. The reduction in Commercial loan application fees of $0.9 million directly reflects slower growth in Commercial lending. In 2012, Meridian experienced substantial growth in Commercial lending, while in 2013, the competitive landscape, coupled with Meridian’s focus on strengthening the Commercial banking model through the Business Banking Transformation initiative, resulted in slower growth.

Besides loan servicing fees, insurance commissions, and Interac revenue also put downward pressure on non-interest income. Insurance commissions declined by $0.9 million, mainly as a result of higher claim levels, and Interac revenue continued to fall due to lower ABM transaction volumes.

Non-interest income was positively impacted by mutual fund revenue growth of $1.3 million or 27.8%, on account of exceptional net sales. Sales were influenced by the integration of Meridian’s Wealth Management workforce into Retail branches, and by growth in the overall Wealth management workforce, as well as favourable market gains on wealth products and the high skill and knowledge level of Meridian’s Wealth

professionals who are able to provide valuable advice to Members. Revenue from service fees also increased by $0.4 million or 3.0%, reflecting the value Members place in the Maximiser suite of account packages. A few new fees were introduced or changed in 2013 following a review of Meridian’s fee structure. These fees had a positive impact on service fee income while remaining favourable, relative to fees of other competitor financial institutions. Fee changes included the introduction of a passbook fee and changes to statement fees.

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

n ($ millions)

h

Service fees 11.92 11.57 3.0%

Mutual fund revenue 6.07 4.75 27.8%

Loan servicing fees 5.32 6.22 -14.5%

Insurance commission 4.74 5.61 -15.5%

Foreign exchange 3.83 3.95 -3.0%

Interac revenue 2.24 2.42 -7.4%

Credit card revenue 0.89 0.88 1.1%

Other 1.65 1.37 20.4%

Total 36.66 36.77 -0.3%

N f I v A J V

Non-interest income from Meridian’s investments in associates and joint venture declined in 2013 by $2.4 million to $3.5 million. This has been a volatile income stream as it largely reflects realized and unrealized gains in the market value of third party asset-backed commercial paper (ABCP) held by the CUCO Cooperative Association. This association was created

to hold the ABCP of the legacy Credit Union Central of Ontario on behalf of Member credit unions, following the merger with Credit Union Central of British Columbia to form Central 1 on July 1, 2008. In 2012, gains on the ABCP investment were significantly higher than other years while in 2013 gains were more moderate as the paper moved closer to maturity.


N x

Non-interest expenses declined in 2013 to $153.3 million, a $3.7 million or 2.4% reduction from the prior year. One of the primary drivers of this reduction was a $5.7 million pension plan curtailment gain in 2013 compared to a $1.1 million curtailment gain in 2012. Another driver was a decline in costs associated with the amalgamation with Desjardins Credit Union which declined from $3.7 million in 2012 to $0.2 million in 2013, as the project reached its final stages of completion. There was an adjustment to the projected run-off pattern for the core deposit intangible (CDI), resulting in a lower amortization expense in 2013. The CDI represents the inherent value in the deposit portfolio acquired during the DCU amalgamation, as they were a low-cost source of funding. The core component of the deposit portfolio is proving to be larger than expected and therefore the intangible asset will be amortized at a slower rate to reflect the extended value. The amortization of the CDI was $2.1 million in 2013 compared to $4.8 million in the previous year.

As well, the level of spending in software and hardware, and transaction services was strategically reduced. Meridian realized the benefits of economies of scale through the DCU amalgamation and was able to decrease data storage costs by securing a new consolidated agreement for this service. Software and hardware costs fell by $0.6 million or 13.6%. The cost of transaction related services also declined by $0.3 million or 3.0% as a result of lower statement expenses. The implementation of new statement fees in 2013 led to Members who place a lower value on paper statements switching to electronic statements.

Personnel expenses which consist of all employee salaries and benefits grew by $0.8 million or 0.9% to $87.7 million. A pension curtailment gain partly offset some of the increase in personnel expenses. Higher personnel expenses are attributable to incremental resources required to implement Meridian’s strategic objectives. Employee growth was mainly related to the two new branches, personnel required for the new Commercial banking delivery model under the Business Banking Transformation program, the continued growth of the wealth management team and project resources who engaged in initiatives to support

Meridian’s strategy. Expenses related to employee benefits fell by $5.0 million or 34.7% as a result of the curtailment gain.

Meridian’s marketing expense increased by $0.2 million or 3.3% in support of building brand awareness. Marketing expenses were associated with print, radio, direct mail and outdoor advertising, as well as community events. Human resource expenses grew by $0.2 million or 8.7% with higher spending to attract talent and promote the wellness of employees. Occupancy costs rose as the branch network was expanded, while deposit insurance grew with growth in deposits.

Meridian’s investment in strategic initiatives was in line with the level of investment in 2012, totalling $2.7 million. These investments were directly related to projects that support Meridian’s strategic objectives. They included the Business Banking Transformation program, implementing the Small Business Banking offering, building new branches, developing the Agency model, implementing the new fraud management system and the enterprise data warehouse.

Non-interest expenses ($ millions)

h

Salaries and benefits Salaries 69.5 63.1 10.1% Benefits 9.4 14.4 -34.7% Variable incentive 8.8 9.4 -6.4%

Occupancy 12.6 12.4 1.6% Transaction services 9.6 9.9 -3.0% Deposit insurance 5.7 5.2 9.6% Marketing 6.2 6.0 3.3% Software and hardware 3.8 4.4 -13.6% Depreciation 5.6 5.3 5.7% Amortization 3.4 5.7 -40.4% Human resources 2.5 2.3 8.7% Other expenses 16.2 18.9 -14.3%

Total 153.3 157.0 -2.4%

ov o f o T x

During 2013, the Federal government legislated changes to phase out a credit union tax deduction that has been available since the 1970’s. The deduction is being phased out over a five-year period beginning in 2013. The result is that Meridian’s Federal effective tax rate will gradually increase from 11% in 2012 to 15% by 2017. The provincial credit union tax

deduction of 7% is not impacted by these changes. As such, Meridian’s provincial effective tax rate will remain at 4.5%. Meridian’s combined effective tax rate was 15.5% in 2012, 16.1% in 2013 and will gradually increase to 19.5% by 2017.

Given the federal tax changes, Meridian revised its tax


strategy for utilization of its deferred tax assets in a more tax effective manner, by deferring utilization of discretionary deductions to future years when the tax rates will be higher. The change in strategy, combined with the revaluation of deferred tax assets at the higher tax rates, resulted in an income tax gain of approximately $4.3 million being recorded in 2013. Current income tax expense of $8.1 million in 2013 reflects the current year taxable income at 16.1% plus $2.9 million of current income tax expense relating to

the change in tax strategy. The net deferred income tax recovery of $5.3 million in 2013 incorporates changes for current year timing differences, adjustments as a result of the revised tax strategy and the impact of increased future tax rates due to the federal credit union tax deduction phase out. Combining current and deferred income taxes, results in a net provision for income taxes of $2.8 million in 2013.

v

Meridian’s track record of profitability has enabled the payment of dividends on its various series of investment shares. Meridian has declared and paid a dividend on each series of these shares since inception, with market leading rates for these types of investments. The dividend rate paid on the “50th Anniversary” and the series 98 shares was 4.75% for

2012 and 2013 (previously 6.0%). The dividend rate paid on the series 01 and series 96 shares was 4.5% for 2012 and 2013 (previously 6.0% for series 01 and 5.75% for series 96), while the dividend rate paid on the series 09 shares has been 5.75%. The payment track record is illustrated in the table below for the last five years.

v n y y

($ millions) “50th Anniversary” Class A shares 2.7 2.6 3.1 2.9 2.8 Series 96 Class A shares 1.8 1.7 2.1 2.0 1.9 Series 98 Class A shares 0.2 0.2 0.2 0.2 0.2 Series 01 Class A shares 2.3 2.2 2.8 2.7 2.6 Series 09 Class A shares 3.8 3.6 3.5 1.0 -

i nci Co di io Revi w

a y

Meridian’s total assets grew by 5.0% to $9.2 billion in 2013, an increase of $438.3 million over 2012. Increased lending to Members was the main contributor to this growth, while the cash and cash equivalents position declined as liquidity was drawn down to fund loans and meet the needs of Members. The other significant contributor to asset growth is an increase in liquidity reserve deposits held with Central 1, one of our key partners.

Loans to Members grew by 8.4% or $630.1 million to $8.1 billion, with Retail mortgages accounting for 75.3% of this growth. Retail mortgages increased by $474.5 million or 11.3%. Growth was generated across all channels including the branch network, through mobile specialists and the broker channel. Competitive and innovative products were offered. Niche broker products in particular were well received and supported the growth in the mortgage portfolio. Growth in Commercial lending slowed in 2013 as the Commercial team focused on developing a new model to better meet the needs of Members and the organization.

$9.2

$8.7

2013

2012

($ billions)

$8.1

$7.5

2013

2012

($ billions)


Member deposits grew by 3.3% or $239.3 million from the previous year to $7.4 billion. Competition for deposits intensified as economic stimulus slowed and financial institutions vied for limited consumer deposit dollars. Registered products were the main drivers of deposit growth for Meridian, particularly tax free savings accounts (“TFSA”). TFSA balances rose 33.7% or $117.1 million, reflecting a Member preference for TFSA term products such as the special rate Save Happy term product offered during Meridian’s investment campaign. Non-registered term deposits grew by 2.0% or $58.7 million while demand deposit balances increased by 2.2% or $57.6 million.

Other than deposits, Meridian’s most significant liability is mortgage securitization which increased by 15.5% or $149.2 million. The increased mortgage securitization liability resulted in a change in Meridian’s leverage ratio from 11.0% in 2012 to 12.1% in 2013.

Meridian’s off-balance sheet assets are largely the wealth portfolio which is comprised of mutual fund assets held by Members. The wealth portfolio experienced significant growth in 2013, with account balances increasing by 32.4% or $256.0 million. This strong growth represents favourable net sales of $156.3 million as well as the appreciation of the market value of Members’ investments.

Overall, the total Member relationships managed by Meridian which include lending, deposits and wealth grew from $15.5 billion in 2012 to $16.5 billion in 2013, a 6.5% increase. Much of this growth was concentrated in Retail banking through mortgage and wealth sales while Commercial growth slowed in 2013 due to the competitive environment and a focus on the business banking transformation program which is intended to strengthen the Commercial banking model and Member offering.

u y v w

Managing liquidity and funding risk is critical to ensure the safety and soundness of Meridian, depositor confidence and stability in earnings. Meridian’s policies ensure that there are sufficient liquid assets and funding capacity to meet financial commitments, even in times of stress. Meridian’s Board policy stipulates the maintenance of a minimum of 7.75% ratio of cash and cash equivalents to Members’ deposits and borrowings (liquidity ratio). As of December 31, 2013, Meridian’s liquidity ratio, including mortgage-backed securities held for reinvestment, was 11.1% compared to 13.9% at the end of 2012, situating Meridian’s liquidity comfortably above the minimum established by the Board.

y

Meridian’s funding strategy follows a sustainable growth approach in that the funding of organic lending growth is primarily accomplished through organic deposit growth. Meridian maintains a large and stable base of Member deposits that, along with our strong capital base, is a source of strength. It supports the maintenance of a sound liquidity position and reduces our reliance on wholesale funding. Member deposits include core deposits and larger retail and commercial fixed rate deposits. During the last quarter of 2013, Meridian entered into $100 million of notional 5-year term pay fixed interest rate swaps to extend the duration of our variable deposits to match our longer term lending products. With the volatility present in

$7.4

$7.2

2013

2012

($ billions)

$1.0

$0.8

2013

2012

($ billions)

$16.5

$15.5

2013

2012

o h ($ billions)


the markets today, this derivative strategy provides protection to our balance sheet.

Securitization remains an attractive funding strategy for Meridian as it provides stable ready access to long term funding at a low cost. This wholesale funding source increased by 32% compared to 2012 as a result

of $210 million of incremental securitization issuances over 2012. Diversification of wholesale funding sources is an important aspect of Meridian’s overall liquidity management strategy. Meridian continues to maintain a diversity of funding sources in the event that future securitization funding may not be available or may only be available at significantly higher rates.

l R v w

Meridian’s regulatory capital ratios are strong and well exceed the requirements of the Credit Unions and Caisses Populaires Act, 1994 (Act) which regulates Ontario Credit Unions and underlies Board policy requirements. These ratios underscore Meridian’s strength and long term stability and commitment to a disciplined approach to capital management that balances the interests and requirements of Members, regulators and depositors. Meridian’s capital

adequacy ratio was 6.6% as of December 31, 2013 compared to 6.3% at the end of 2012 and 4.0% stipulated in the Act. Meridian’s risk weighted capital adequacy ratio was 13.4% at the end of 2013, up from 12.7% in 2012 and significantly higher than the 8.0% stipulated in the Act. In addition, Tier 1 capital as a percentage of total assets must be greater than 60.0%. Meridian’s Tier 1 capital is 87.5% of its total capital.

Risk Management

Ov vi w

Meridian’s activities expose the organization 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 while remaining within our risk appetite.

The main drivers of success of Meridian’s risk management are the independence of our risk management practices and oversight, and the comprehensiveness of our risk management framework and approach that addresses all risks. Like other financial institutions, we continually face challenges in managing risks with the key challenges being, the increasing volume and complexity of regulatory requirements, the competitive pressures in attracting and retaining Memberships and the continued low interest rates and increasing commoditization of core products.

In 2013, a number of activities were undertaken to enhance Meridian’s risk management. These included:

Established the Board Risk Committee; Developed enhanced enterprise risk management

and risk appetite frameworks;

Developed an internal risk adjusted return on Capital application for Commercial Lending;

Completed gap analyses of OSFI Guidelines to enhance risk management practices; and

Completed lending guideline and risk rating model enhancements.

We continue to improve and enhance our risk management practices and in 2014 our key priorities will be to:

Establish new risk tolerance limits and supporting key risk indicators for core credit, market and operational risk classes;

Develop and prioritize gap closure plans from the OSFI guideline gap analysis;

Enhance our risk management infrastructure and technology platforms to support increased capabilities and efficiency;

Develop and implement stress testing and internal capital adequacy assessment process programs;

Scope and design of work flow and control enhancements arising out of the Business Banking Transformation program; and

Promote a strong risk culture across the organization through internal enterprise risk management communication, awareness and training programs.


i are statements which reflect the organization’s enterprise risk management objectives and its risk taking philosophy.

R are financial benchmarks that establish the amount of risk (i.e. a risk “budget”) an organization is prepared to accept in specific risk categories to facilitate value creation for risk-taking. Criteria provide supporting guidance for the development of robust risk appetite statements.

K y A establish where and how the risk appetite will be embedded and operationalized within the organization’s strategic and operational processes.

n establishes the protocols that ensure the risk appetite is subject to appropriate internal controls. These protocols include roles and responsibilities, monitoring and reporting and the actions taken when breaches are identified.

c

Meridian’s enterprise risk management framework establishes an organizational structure which encompasses employees within individual business units who follow and seek to enhance processes/procedures/controls in place to manage risk, all the way to the Board of Directors who have overall responsibility for the establishment and oversight of Meridian’s enterprise risk management framework.

A critical element of this structure is the Three Lines of Defence model.

This model recognizes that:

Everyone in the organization has a role to play in effective risk management and control; and Without a cohesive coordinated approach, limited risk and control resources many not be deployed effectively and

significant risks many not be identified or managed appropriately.

The foundation of Meridian’s enterprise risk management framework is a governance structure that includes a robust committee structure. The Committee structure of the risk governance model is presented below. A description of the responsibilities for each member in the Committee structure follows.

R k Delivery and Corporate Business Unit Accountabilities First Line of Defence

• Identifies and manages risk in day-to-day activities • Designs, implements and maintains effective internal controls • Implements risk-based approval processes

v Governance, Risk & Control Business Unit Accountabilities Second Line of Defence

• Establishes enterprise governance, risk ,and control strategies and practices • Provides oversight and independent challenge to the First Line through review, inquiry, and discussion • Develops and communicates governance, risk, and control policies • Provides training, tools, and advice to support policy and compliance • Monitors and reports on compliance with risk appetite and policies

n Internal Audit Services Third Line of Defence

• Validates the effectiveness of the First and Second Lines of Defence in fulfilling their mandates and managing risk • Independently verifies that the enterprise risk management framework is operating effectively


The oversees the strategic direction of Meridian and has overall responsibility for the establishment and oversight of Meridian’s enterprise risk management framework. This includes the following:

Ensure management has implemented an effective system to manage the risks of the organization;

Regularly reviewing and discussing the risks with management;

Receive information about the organizational risks, especially the residual high risks, and how management plans to handle them within the approved risk appetite;

Ensure the organization’s enterprise risk management (ERM) policies and procedures are consistent with the strategy, and are functioning as directed;

Work with management to promote and actively cultivate the culture;

Provide leadership in embedding an enterprise risk management culture;

Review with management the Board’s expectations as to the roles, responsibilities, and expectations for risk, and the management thereof, to ensure a shared understanding;

Review/approve risk appetite and related risk limits;

Develop ownership of ERM at the Board level; Review with management the quality, type and

format of risk-related information provided to directors; and

Review reports from management, independent auditors, insurers, regulators, and external experts as appropriate regarding risk the organization faces, and the ERM function.

The Board accomplishes its mandate both directly and through its Risk Committee and Audit & Finance Committee, described below.

The is responsible for overseeing risk management across Meridian, and assists the Board in fulfilling its responsibilities for approving the Credit

Union’s risk appetite and overseeing Meridian’s risk profile and performance against the defined risk appetite. This includes oversight of policies, procedures, and limits related to the identification, measurement, monitoring and control of Meridian’s critical enterprise risks.

The Risk Committee is accountable for:

Reviewing management’s identification and mitigation plans for the significant risks of the Credit Union;

Overseeing the application of the ERM program and reporting to the Board of Directors on risk exposure; and

Monitoring risk appetite metrics and reviewing the risk appetite framework.

The n , in addition to overseeing financial reporting, regulatory compliance, and internal/external audit, assesses the adequacy and effectiveness of internal controls, including controls over relevant risk management processes.

The v leads Meridian’s Executive Leadership Team 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 has ultimate accountability and responsibility for:

Shaping the culture; Working with Board and leadership to determine

the risk appetite for the organization; Ensuring that the leadership understands the

“enterprise” part of ERM; Positioning enterprise risk management for

success; and Holding leaders accountable for execution.

The President and Chief Executive Officer is supported by five n t in the overall management of Meridian's risk.

M C s:

The M n k , which comprises the Executive Leadership Team and Senior Leadership Team members of the Operating Committee, provides a forum for the strategic assessment of risks – identifying, reviewing and advising on current and emerging risk issues and associated mitigation plans. The Committee is responsible for ensuring that Meridian’s risk profile is consistent with its strategic objectives and risk appetite and there are continuous, appropriate and effective risk management processes. Risk Management Services supports the Committee in the performance of these activities.

The Management Risk Committee is specifically accountable for:

Providing oversight and direction to Risk Management Services for the ERM program;

Considering risk mitigation reports coming back from respective managers;

Assessing the risks keeping in view the framework;

Assigning responsibility for risk mitigation; Identifying significant risks from a residual risk

perspective; Evaluating Meridian’s risk profile on a regular


basis; Reviewing and evaluating material risk exposures,

and ensuring that they are reported to the Audit & Finance Committee and the Board of Directors;

Implementing internal control activities within their respective areas to ensure appropriate risk mitigation;

Monitoring action taken to mitigate any significant exposures;

Ensuring risk assessments are performed periodically;

Evaluating the enterprise risk management reporting for adequacy and usefulness; and

Communicating the risk management process and status to the Board/Committees.

The y n , which comprises the President and Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Member Services Officer (CMSO) and senior leaders from Delivery and Credit Risk Management, reviews Meridian’s overall loan portfolio key indicators and monitoring performance against established Credit policy. Key activities include reviewing key portfolio management indicators (sector/connected party limits, delinquency and impairment trends, and watch list reports), review pipeline reporting to ensure lending is managed within established commercial loan targets, 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 b y , 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 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 , comprised of the Chief People Services Officer, Chief Member Services Officer, Chief

Financial Officer, and senior leaders from Finance, Risk Management Services, 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 n 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. More specifically, the Senior Leadership Team will be accountable and responsible for:

Identifying new risks Monitoring existing risks on a continuous basis and

providing status reports to the Management Risk Committee

Obtaining and allocating resources for risk mitigation

Implementing internal controls and mitigation supporting processes

Proposing amendments or enhancements to Meridian’s risk appetite

Managing risk in their portfolio(s) Working with colleagues to ensure that ERM is

integrated across the organization Working with direct reports to establish the culture

of ERM Overseeing the implementation and compliance of

policies and procedures within their portfolio(s) Overseeing the implementation of risk reduction

and mitigation strategies within their portfolio(s)

k n , one of the Second Lines of Defence, is responsible for the design and application of Meridian’s enterprise 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:

Establish policies, procedures and limits that align with Meridian’s risk appetite;

Identify, assess, mitigate and monitor the risks associated with business activities and strategies; and

Provide education and awareness relative to Meridian’s enterprise risk management framework.

Risk Management Services is also accountable for:

Maintaining and refining Meridian’s Enterprise risk management program and its related systems;

Periodically reviewing and recommending changes, if any, to the enterprise risk management and risk appetite frameworks;


Providing consultation to Management on risk-related issues;

Coordinating risk reporting to the Risk Committee, Audit & Finance Committee and Board of Directors; and

Developing and delivering educational presentations internally to Management, Board Committees and the Board of Directors as required.

Risk Management Services will develop and submit for approval to the Risk Committee an annual plan to update and refine the enterprise risk management program and will provide an update at least annually to the Risk Committee on the status of these plans.

n , the Third Line of Defence, provides independent assurance to the Board of Directors, through the Audit & Finance Committee, of the effectiveness of risk management, control and governance processes that are in place to manage the risks that are faced by Meridian.

n , the First Line of Defence, 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.

G & l

This element of the framework establishes the enterprise risk universe and the policies, processes and controls that are designed to ensure that risks in that universe are being appropriately identified and managed. Board Policies consist of both those risk management policies required by DICO By-Law No. 5 and the other Board policies established by management for other critical functions/activities.

Risk management frameworks and policies establish the necessity for this framework and its applicability to the enterprise risks and also include management policies and procedures to manage risk.

Risk review and approval processes establish approval responsibilities governed by delegated authorities for specific categories. They are established based on the nature, size and complexity of the risks involved. In general, the process involves a formal review and approval by an individual or a committee that is

independent of the originator. The approval responsibilities are governed by delegated authorities based on the following categories:

Portfolio transactions Structured transactions Strategic projects and initiatives New products and services

Authorities and Limits act as a key control for underwriting, investing, hedging, structuring, and maintaining adequate liquidity. The Board of Directors maintains overall responsibility for the risks to which Meridian is exposed. However, the Board delegates the responsibility of managing specific risks, on a day-to-day basis, to certain members of Senior Management and/or Executive Committees. The delegation of responsibility by the Board of Directors is in accordance with the provisions of a particular Board policy.

y & T

This element of the framework encompasses tools to monitor risk management programs and obtain relevant risk information. The loss database is a key, standard element of the resources needed for effective Enterprise risk management. The collection and analysis of internal loss data provides management information which can be fed back into the enterprise risk management and mitigation process. In addition, the database of internal loss events builds up over time and provides the basis for quantitative analysis and the calculation of capital allocation. We will develop financial models to determine the aggregate risk in our financial portfolios. A variety of techniques

will be used to analyze a portfolio and make forecasts of the likely losses that would be incurred for a variety of risks and the amount of capital to maintain. Such risks are typically grouped into credit risk, liquidity risk, market risk, and operational risk categories. Benchmarking is used to evaluate various aspects of the enterprise risk management processes in relation to both Meridian’s performance and performance of other external parties. Benchmarking will be used to develop plans on how to make improvements or adapt specific best practices with the aim of increasing some aspect of performance.


d tific tion nd M n g m n of Key Ri k

Management has identified six 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 framework. A discussion of each risk and how it is managed follows.

R k

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; and

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.

M k R k

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 Meridian’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.

y k

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:

The CMB securitization program; Two lines of credit with Central 1, a Total Basic

Credit Facility which provides for general borrowing and letters of credit, and a Capital Markets Line which provides for the exposure in the CMB securitization program and any derivative exposure Meridian has with Central 1;

An additional credit facility with a Schedule I bank which enables management to borrow both overnight as well as longer-term, to fill short-term liquidity fluctuations caused by seasonal growth patterns, as well as provide the comfort of longer-term borrowing in the event that the CMB program was unavailable to provide necessary funding;

Deposit brokerage channels; and Issuance of mortgage-backed securities to market.

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 & Finance 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.

M R k

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.

The responsibility for Member risk management resides primarily with Meridian’s Delivery and Marketing teams which work together to engage Members, determine their wants and needs and develop the appropriate plans to meet both current and anticipated expectations. Supporting Delivery and Marketing in the management of Member risk is Meridian’s Operating Committee and Executive Leadership Team which provide direct oversight to Meridian’s strategic initiatives. Given the importance of meeting Member expectations and providing a superior level of service, initiatives related to these objectives are designated as strategic and awarded a high priority for completion.

Meridian differentiates itself by providing an exceptional Member experience. It is the responsibility of every employee to help deliver this experience. This process helps create ownership and buy-in from all groups within Meridian.

The Board of Directors provides oversight to the strategic direction of Meridian and therefore approves the strategic plans developed by management which include initiatives which will manage Member risk.

R

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. Meridian’s Executive Leadership Team, led by the President & Chief Executive Officer, are responsible for setting the long-term business strategy. Implicit in the development of this strategy are strategic objectives and related initiatives which will address the risk of competition. Members of the Senior Leadership Team support the Executive Leadership Team in the management of competition risk by providing insight to

the environmental scan and current state assessment, and proposing key initiatives expected to achieve the strategic objectives. Given the importance of sustainable competitive advantage, initiatives which contribute to this are designated as strategic and awarded a high priority for completion.

The Board of Directors provides oversight to the strategic direction of Meridian and therefore approves the strategic plans developed by management which include initiatives which will manage competition risk.

t R

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 its comprehensive Enterprise Strategic Planning process, which encompasses financial and strategic planning at business unit and enterprise-wide levels. Meridian’s Executive Leadership Team, led by the President and Chief Executive Officer, is responsible for developing and recommending strategies as well as operational and financial plans for the Board’s approval, and to report to the Board, in a timely and accurate manner, on Meridian’s performance against stated objectives. In developing the draft strategic plan for the Board’s consideration, Management will involve the Board, as appropriate, at such points in the planning process where perspectives on Member and larger system issues are desired.

The Board of Directors has two key responsibilities. To establish strategic direction, and regularly review that direction to ensure it responds to the changing business environment in which Meridian operates; and, to monitor Meridian’s performance. In fulfilling these responsibilities, the Board provides input to, and approves, the annual strategic, operational, and financial plans and regularly reviews Meridian’s progress towards achieving the priorities and performance expectations established in the plan.

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 effectiveness and risks.

O l R

Operational risk is the risk of loss resulting from inadequate or failed human performance, processes, or technology. Meridian 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, failed transaction processing, and non-compliance with regulatory requirements, legal obligations, or internal policies. The failure to manage operational risk can result in direct or indirect financial loss, reputational impact, regulatory censure, and 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, 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.

E R sks

The Senior Leadership Team is accountable for identifying and reporting on risks that may develop over time. While these risks may not be specifically actionable now, they require monitoring as they may impact Meridian’s operations. Emerging risks are currently identified through the knowledge and experience of Senior Management. A dashboard of key economic indicators has been developed that is used to help identify issues and trends which could lead to emerging risks.

C p al Management

Ove view

Meridian 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 our Members, promotes confidence in attracting new Members to Meridian, maintains strong returns to Meridian’s Class A Shareholders and allows Meridian to take advantage of growth opportunities.

p M n g m n o ophy

Meridian’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.

pi M n g m n am work

The principles and key elements of our 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.

pi M n g m n Gov n nc

The Board of Directors and its Risk Committee provide ultimate oversight and approval of capital management, including the capital management policy and annual capital plan. They regularly review Meridian’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. The Audit & Finance Committee monitors compliance with the capital management policy.


Ma i g nd Mo i ori g C pi

Meridian has a comprehensive risk management framework to ensure that the risks taken while conducting business activities are consistent with its risk appetite. In managing our 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, 87.5% 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.

2014 Outlook

Economic growth in Canada is anticipated to accelerate in 2014 fuelled by increased demand for Canadian exports. A weaker Canadian dollar will help spur this external demand coupled with improved economic prospects globally, and in particular, in the U.S. The Bank of Canada now expects inflation to return to the Bank’s target of 2% in 2016 instead of 2015, leading to speculation by some analysts that low interest rates may persist longer than previously thought. In Ontario, exports are projected to grow and employment is anticipated to increase, leading to a rise in household demand. The housing market is expected to continue to slow with stronger growth in sales of existing homes than new homes. Given the economic outlook, it is anticipated that much of the 2013 challenges will persist in 2014, that being margin compression and a competitive environment for mortgages and deposits.

Despite the challenges, Meridian has engaged a number of activities to strengthen and build capabilities to achieve long term sustainable growth. Member relationships are anticipated to grow faster in 2014 with continued strong Wealth performance.

Revenue growth is expected to be favourable, though non-interest revenue growth will be limited as yields on the CUCO Cooperative Association investments will decline and offset gains in other areas such as commercial loan fees. Increases in operating expenses will primarily arise from an increase in resources required to implement initiatives in support of Meridian’s strategic objectives. With an ongoing focus on long-term sustainability, Meridian will continue to strengthen its capital base, supported by positive earnings. A strong capital base will allow the Credit Union to be well positioned to take advantage of future opportunities and make investments that are of value and in the best interest of Members.

In 2014, efforts to build brand awareness will continue with several marketing campaigns and the release of a number of advertisements as part of the Ontario awareness campaign. Product and channel expansion will continue to best meet the needs of Members. An ongoing focus will remain on increasing Member access, with new digital capabilities being implemented.

2013 Annual Report | Consolidated Financial Statements 45

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

For the year ended December 31, 2013 and 2012

Independent auditor’s report 46

Consolidated balance sheet 47

Consolidated statement of comprehensive income 48

Consolidated statement of changes in equity 49

Consolidated statement of cash flows 50

Notes to the consolidated financial statements:

Nature of operations 51 Investments available for sale 67

Basis of preparation 51 Investment in associates 68

2.1 Statement of compliance 51 Investment in joint venture 69

2.2 Use of estimates and judgments 51 Intangible assets 71

2.3 Regulatory compliance 52 Property, plant and equipment 72

Summary of significant accounting policies 52 Other assets 73

3.1 Basis of consolidation 52 7 Members’ deposits 73

3.2 Business combinations 53 Borrowings 73

3.3 Foreign currency translation 53 Payables and other liabilities 74

3.4 Financial assets and financial liabilities 53 Mortgage securitization liabilities 74

3.5 Interest income and expense 55 Provisions 76

3.6 Fee and commission income 55 Deferred income taxes 76

3.7 Impairment of financial assets 56 Pension and other employee obligations 78

3.8 Intangible assets 56 Share capital 83

3.9 Property, plant and equipment 57 Net interest income 86

3.10 Impairment of non-financial assets 57 Non-interest income 87

3.11 Leases 57 7 Provision for income taxes 87

3.12 Provisions 58 Related party transactions 88

3.13 Employee benefits 58 Contingent liabilities and commitments 90

3.14 Income taxes 58 Regulatory information 92

3.15 Share capital 59 Financial risk management 93

Changes in accounting policies 59 31.1 Credit risk 93

Retrospective application of new accounting 61 31.2 Market risk 95

standards and restatement of prior period 31.3 Liquidity risk 98

Cash and cash equivalents 62 31.4 Fair value of financial assets 100

7 Receivables 63 and financial liabilities

Investments - other loans and receivables 63 31.5 Capital management 103

Loans to Members 63 Authorization of consolidated financial statements 104

Derivative financial instruments 66

Consolidated Financial Statements


March 12, 2014

N N R R

r n We have audited the accompanying consolidated financial statements of Meridian Credit Union Limited and its subsidiaries, which comprise the consolidated balance sheets as at December 31, 2013 and 2012, and the consolidated statements of comprehensive income, of changes in equity and cash flows for the years then ended, and the related notes, which comprise a summary of significant accounting policies and other explanatory information.

n Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. u i n t

Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

n In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Meridian Credit Union Limited and its subsidiaries as at December 31, 2013 and 2012, and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards.

Chartered Professional Accountants, Licensed Public Accountants


ER AN CRE N ON E N A ANG N Y

For the year ended December 31, 2013 and 2012

N (thousands of Canadian dollars)

N n

r

v

y

y , $ 217,448 $ 104,761 $ 204,663 $ - $ 526,872

Dividends on Members’ capital accounts - - (10,772) - (10,772)

4 Shares issued as dividends 9,436 - - - 9,436

r n 9,436 - (10,772) - (1,336)

Profits for the year attributable to Members - - 56,625 - 56,625

Other comprehensive income:

Actuarial losses in defined benefit pension plans - - - - -

Income taxes relating to actuarial losses in defined benefit pension plans - - - - -

Cash flow hedges – effective portion of changes in fair value

- - - 617 617

Income taxes relating to effective portion of changes in fair value of cash flow hedges

- - - (107) (107)

h v t - - 56,625 510 57,135

, $ 226,884 $ 104,761 $ 250,516 $ 510 $ 582,671

N (thousands of Canadian dollars)

c

N n R

r

v

y $ 208,490 $ 104,761 $ 191,325 - $ 504,576

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

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

r n c n 8,958 - (10,329) - (1,371)

Profits for the year attributable to Members as restated - - 23,801 - 23,801

Other comprehensive income:

Actuarial losses in defined benefit pension plans

- - (159) - (159)

Income taxes relating to components of other comprehensive income as restated - - 25 - 25

o h y

-

-

23,667 - 23,667

, $ 217,448 $ 104,761 $ 204,663 - $ 526,872

See accompanying notes to the consolidated financial statements


ER AN CRE N ON E N O A NAN A N For the year ended December 31, 2013 and 2012

N

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 64 branches and seven commercial business centres across Ontario.

i

2.1 t n c

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 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.

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 3.7 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 3.10.



2.2 R z i 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 3.14 and note 22.

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 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

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

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.



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 n n

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.

c

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.



3.4 i n Derivative financial instruments Derivative financial instruments are contracts, such as options, swaps 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. Gains or losses are recognized in profit or loss in other interest income, unless the derivative is designated as a hedging instrument. For designated hedging instruments, the recognition of the gain or loss will depend on the hedge accounting rules described below. 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.

Hedge accounting The Credit Union documents at the inception of the transaction the relationship between hedging instruments and hedged items, as well as the risk management objectives and strategies for undertaking various hedge transactions. The Credit Union also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items attributable to the hedged risk. In a cash flow hedge, the effective portion of changes in fair value of derivatives that are designated and qualify as cash flow hedges is recognized in other comprehensive income (“OCI”). The gain or loss relating to the ineffective portion is recognized immediately in profit or loss within net interest income. Amounts accumulated in OCI are reclassified to profit or loss in the periods when the hedged item affects profit or loss and are recorded within net interest income. The Credit Union utilizes cash flow hedges primarily to convert floating rate assets and liabilities to fixed rate. When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in accumulated other comprehensive income (“AOCI”) at that time remains in AOCI and is recognized in the statement of comprehensive income as the hedged item affects earnings. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in OCI is immediately transferred to the income statement within net interest income. If a forecast transaction is no longer highly probable of occurring, but is still likely to occur, hedge accounting will be discontinued and the cumulative gain or loss existing in AOCI at that time remains in AOCI and is amortized to net interest income in the statement of comprehensive income at the same time the hedged item will affect earnings. 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 accumulated other comprehensive income are recognized in profit or loss.



3.4 i n 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.

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 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.



3.7 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.

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.

3.8 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, except for core deposit intangible assets, 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. An accelerated method of amortization is used for core deposit intangible assets based on the anticipated runoff pattern over a 7 year period.



3.8 n n i Intangible assets are subject to impairment review as described in note 3.10. The Credit Union does not have any intangible assets with indefinite lives. The Credit Union has not recognized any internally generated intangible assets.

3.9 , 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 3.10.

3.10 n n 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.

3.11

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.



3.12 v 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.

3.13 y

(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 unit cost 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. Service cost is the change in the present value of the defined benefit obligation resulting from employee service in either the current period or prior periods and from any gain or loss on settlement. Net interest is the change in the net defined benefit liability or asset that arises from the passage of time. Both service cost and net interest are recognized immediately in salaries and employee benefits. Remeasurements of the net defined benefit liability include actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions, the return on plan assets excluding amounts included in net interest and changes in the effect of any asset ceilings. Remeasurements are recognized immediately in other comprehensive income. The net defined benefit liability or asset recognized in the consolidated balance sheet is the plans’ deficit or surplus at the balance sheet date, adjusted for any effect of limiting a net defined benefit asset to the asset ceiling. The plans’ deficit or surplus is the present value of the defined benefit obligation less the fair value of plan assets.

(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.

3.14 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.



3.15 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.

n n un

The Credit Union has adopted the following new standards and amendments to standards, including any consequential amendments to other standards, with a date of initial application of January 1, 2013. (a) 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 International Accounting Standard (“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. There are no changes in the method of accounting for the Credit Union’s investees as a result of the changes to IFRS 10 or IFRS 11. The new disclosure requirements of IFRS 12 have been incorporated in the consolidated financial statements for the current year. (b) 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.

There are no changes in the valuation of the Credit Union’s financial assets or financial liabilities as a result of this standard. Some additional disclosures have been incorporated in the notes as a result of IFRS 13 requirements. (c) IAS 19, Employee Benefits, was amended in June 2011. In the current year, the Credit Union has applied IAS 19, Employee Benefits (as revised in 2011) and the related consequential amendments for the first time. IAS 19 has been amended to make changes to the recognition and measurement of defined benefit pension expense and termination benefits and to enhance the disclosure of all employee benefits. Under amended IAS 19, past service costs resulting from plan amendment or curtailment will be recognized in profit and loss at the date that the amendment or curtailment occurs. The previous version of the standard amortizes past service costs (excluding those relating to curtailments) over the period to full vesting. Meridian pensions have no unamortized past service costs, so this change has no impact on the financial statements. The revised standard now requires actuaries to make an explicit “form of payment” assumption for defined benefit pension plans. This assumption relates to whether plan members will take a lump sum payment for the commuted value of their pension upon termination or retirement. Also, as part of the amendments, pension benefit cost will be split between (i) the cost of benefits accrued in the period (service cost) and benefit changes (past service cost, settlements and curtailments); and (ii) finance expense or income. The finance expense or income component will be calculated based on the net defined benefit asset or liability. A number of other amendments have been made to recognition, measurement and classification including redefining short-term and other long-term benefits and expanded disclosures. Specific transitional provisions are applicable for the first-time application of IAS 19 (as revised in 2011). The Credit Union has applied the relevant transitional provisions and restated the comparative amounts on a retrospective basis (see the table included in note 5 for details).



n n n

(d) IAS 1, Financial Statement Presentation, was amended in June 2011. Amendments to IAS 1 deal with presentation of other comprehensive income on the face of the financial statements and in the notes. The changes require companies to group together items within other comprehensive income that may be reclassified to the profit or loss section of the statement of comprehensive income. The statement of comprehensive income has been modified to show separately line items that will be reclassified subsequently to profit or loss and those that will not be reclassified to profit and loss. (e) IAS 32, Financial Instruments: Presentation, was amended in May 2012 as part of the Annual Improvements Cycle 2009-2011. The amendment resolves a perceived inconsistency with IAS 12, Income taxes, by clarifying that accounting for the income tax effects of distributions to equity shareholders are recognized in profit or loss as per IAS 12 to the extent that the distribution relates to income arising from a transaction that was originally recognized in profit or loss. Previously, IAS 32 required recognition of income tax relating to distributions to holders of equity instruments in equity.

The Credit Union receives a tax credit on dividends paid to equity shareholders. Previously, this tax benefit was recognized directly in equity. The Credit Union has adopted this change in accounting policy and restated the comparative amounts on a retrospective basis (see the table included in note 5 for details). 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 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. 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. In July 2013 IFRS 9 was updated to remove the mandatory effective date and leave the date open pending finalization of other components of IFRS 9. Revisions to the impairment standards, and limited amendments to the classification and measurement of financial instruments are expected to be issued during 2014. In November 2013 the IASB issued further amendments to IFRS 9 which introduced a new hedge accounting model. The amendments introduce significant changes that enable companies to better reflect their risk management activities through hedge accounting. The new standard results in a simplified hedge accounting model and it is not anticipated that any of Meridian’s current hedging relationships will be impacted. The Credit Union will assess the impact of the new requirements as it relates to future derivative strategies prior to the effective date of implementation. (b) IAS 32, Financial Instruments: Presentation, was amended in December 2011. Amendments to IAS 32 provide additional application guidance for offsetting of financial instruments in the balance sheet.

Revisions to IAS 32 are effective for annual periods beginning on or after January 1, 2014. As the Credit Union does not have any offsetting assets and liabilities no changes as a result of the amendments to IAS 32 are anticipated.



r v c

The consolidated financial statements include prior period restatements for the following items: (a) IAS 19, Employee Benefits As detailed in note 4, the Credit Union has applied amendments to IAS 19 in the current year. Transitional guidance relating to these changes in accounting policy requires retrospective application of the amended standard. As such, comparative information has been restated to reflect amounts that would have been presented had the revised standard been in effect during the prior periods.

An adjustment of $1,694,225 was made to opening retained earnings at January 1, 2012. This adjustment was largely due to reflecting the revised commuted value of the pension under the new form of payment assumption. The discount rate used to calculate commuted values is lower than the accounting discount rate used to value the pension liability. The impact of the opening adjustment and restatement of financial statement line items for comparative years are reflected in the tables at the end of this note. (b) IAS 32, Financial Instruments: Presentation As detailed in note 4, the Credit Union applied amendments to IAS 32 in the current year. These amendments resulted in a change in accounting policy that requires retrospective application. As such, comparative information has been restated to reflect the income tax benefit from dividends as a reduction to income tax expense during the prior period versus recognizing the benefit through retained earnings.

An adjustment of $1,600,925 was made to reduce income tax expense for the year ending December 31, 2012 on the consolidated statement of comprehensive income. There were no changes to the consolidated balance sheet because the amount had previously been recognized directly through retained earnings. The impacts of the restatement on financial statement line items for the comparative year are reflected in the tables at the end of this note. (c) Securitization fees adjustment The financial statements include a prior period restatement in relation to the amortization of upfront securitization fees. During the year, management discovered that the amortization method used historically for upfront securitization fees was not appropriate as it did not reflect the runoff pattern of the underlying mortgage portfolio. In order to correct the deferred securitization fee amortization a pre-tax adjustment of $919,269 was made to increase the 2012 amortization expense included in non-interest income on the statement of comprehensive income. The impact of this adjustment and restatement of financial statement line items for the comparative year are reflected in the tables at the end of this note. (d) Pension curtailment adjustment The financial statements include a prior period restatement in relation to the 2012 curtailment of one of the Credit Union’s defined benefit pension plans. This plan contains a pre-retirement indexing clause, that if a Member terminates before retirement, their pension is indexed every year until his retirement date. During the year, management was advised by the actuary performing the valuations for this plan that the pre-retirement indexing provision was not factored into the original calculation of the curtailment gain. The correct calculation resulted in a pre-tax reduction of $1,821,000 to the curtailment gain included in salaries and employee benefits on the statement of comprehensive income. The impact of this adjustment and restatement of financial statement line items for the comparative year are reflected in the tables at the end of this note. The following tables reflect the impact of the retrospective application of IAS 19, Employee Benefits and IAS 32, Financial Statements: Presentation (see note 4), as well as restated comparative year amounts for the securitization fees adjustment and pension curtailment adjustment.

(thousands of Canadian dollars) p v u

d i

r v

z n

u n

u

y

Deferred income tax assets 17,905 311 - - 18,216 Others 7,823,792 - - - 7,823,792

7,841,697 311 - - 7,842,008

Pension and other employee obligations

32,331

2,005

- 34,336

Others 7,303,096 - - - 7,303,096

7,335,427 2,005 - - 7,337,432

Retained earnings 193,019 (1,694) - - 191,325 Others 313,251 - - - 313,251

i 506,270 (1,694) - - 504,576



Residential mortgage loans are repayable in monthly blended principal and interest instalments over a maximum term of ten years, based on a maximum amortization period of 35 years. Open mortgages may be paid off at any time without notice or penalty and closed mortgages may be paid off at the discretion of the Credit Union, but are subject to penalty. Commercial loans and personal loans, including line of credit loans, are generally repayable in monthly blended principal and interest instalments over a maximum amortization period of 25 years, except for line of credit loans, which are repayable on a revolving credit basis and require minimum monthly payments.

l

(thousands of Canadian dollars) R n

l n

v i

Y

y 420 1,024 30,626 13,482 45,552

Loans written off (774) (1,419) (12,460) - (14,653)

Recoveries on loans previously written off 62 299 37 - 398

Provision for credit losses 828 721 2,411 2,574 6,534

536 625 20,614 16,056 37,831

(thousands of Canadian dollars) R n

l n

i

Y

nc n y 605 544 18,997 10,611 30,757

Loans written off (742) (1,200) (17,836) - (19,778)

Recoveries on loans previously written off 50 267 17 - 334

Provision for credit losses 507 1,413 29,448 2,871 34,239

420 1,024 30,626 13,482 45,552

(thousands of Canadian dollars)

n

Gross amount of loans identified as impaired 16,862 2,068 65,759 84,689

Related security net of expected costs 16,326 1,443 45,145 62,914

536 625 20,614 21,775

Interest income recognized on impaired loans 4,819


n

Gross amount of loans identified as impaired 10,964 4,227 127,743 142,934

Related security net of expected costs 10,544 3,203 97,117 110,864

nc , 420 1,024 30,626 32,070

Interest income recognized on impaired loans 5,937

The allowance for impaired loans provided for in the accounts of the Credit Union is in accordance, in all material respects, with the DICO by-law governing such allowances.



c

The tables below provide a summary of the Credit Union’s derivative portfolio and the notional value of the financial assets or financial liabilities to which the derivatives relate.

v n

(thousands of Canadian dollars) i y t y t l

i n

v n

Y Foreign exchange derivatives: Forward contracts 6,033 - 6,033 293 282 Equity index-linked options: Purchased equity options 62,688 157,290 219,978 23,258 - Interest rate swaps: Designated cash flow hedges - 100,000 100,000 433 -

68,721 257,290 326,011 23,984 282

n v

(thousands of Canadian dollars) i t y t l

iv v n

v v n

Y m Foreign exchange derivatives: Forward contracts 8,155 4,183 12,338 124 101 Equity index-linked options: Purchased equity options 59,863 189,223 249,085 22,692 -

v 68,018 193,406 261,423 22,816 101

The notional amounts are used as the basis for determining payments under the contracts and are not actually exchanged between the Credit Union and its counterparties. They do not represent credit or market risk exposure.

The Credit Union has credit risk, which arises from the possibility that its counterparty to a derivative contract could default on their obligation to the Credit Union. However, credit risk associated with derivative contracts is normally a small fraction of the notional principal amount of the contract. Derivative contracts expose the Credit Union to credit loss where there is a favourable change in market rates from the Credit Union’s perspective and the counterparty fails to perform. The Credit Union only enters into derivative contracts with a counterparty that the Credit Union has determined to be creditworthy. Foreign exchange forward contracts As part of its ongoing program for managing foreign currency exposure, the Credit Union enters into foreign exchange forward contracts to purchase U.S. dollars. These agreements function as an economic hedge against the Credit Union’s net U.S. dollar denominated liability position. The fair value of these contracts as at December 31, 2013 was $10,591 (2012 - $22,901). Of this balance, $292,615 (2012 - $123,910) is included in derivative instrument assets and $282,024 (2012 - $101,009) is included in derivative instrument liabilities. Gains/losses on foreign exchange forward contracts are included in non-interest income (see note 26). Equity index-linked deposits The Credit Union has $221,596,512 (2012 - $246,742,150) of equity index-linked term deposit products outstanding to its Members. These term deposits have maturities of up to seven years and pay interest to the depositors, at the end of the term, based on the performance of various market indices. The Credit Union has purchased equity index-linked options agreements with various counterparties to offset the exposure to the indices associated with these products. The Credit Union pays a fixed amount based on the notional amount at the inception of the equity index-linked option contract. At the end of the term the Credit Union receives from the counterparties payments equal to the amount that will be paid to the depositors based on the performance of the respective indices.



n n i


Y c m

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

Additions, separately acquired - 2,062 238 2,300

Amortization (2,132) (968) (291) (3,391)

m v u 5,912 3,320 562 9,794

Cost 16,601 10,665 3,305 30,571

Accumulated amortization 10,689 7,345 2,743 20,777

y u 5,912 3,320 562 9,794


Y

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

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

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

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

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

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

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

The reviews of useful lives of intangibles during 2013 resulted in a change in estimate of the useful life of the core deposit intangible asset. The estimated runoff period for the demand deposits has been extended to seven years (previously five years) following a study of deposit runoff patterns performed by management. This change in accounting estimate is recognized prospectively and results in the following change in the original trend of amortization:

(thousands of Canadian dollars) 4 7

Increase (decrease) in amortization (1,744) (678) 189 1,162 873 198



x The movement in the deferred income tax account is as follows: n z

(thousands of Canadian dollars)y

Non-capital losses available for carryforward 10,095 6,439 - 16,534

Allowance for impaired loans 2,587 546 - 3,133

Employee future benefits 3,259 (555) - 2,704

Other accrued expenses 334 (1) - 333

Property, plant and equipment 3,876 (1,194) - 2,682

Fair value adjustments on acquisition (1,779) 255 - (1,524)

Deferred expenses (1,106) (169) - (1,275)

Financial instruments adjustments (44) (3) - (47)

Mortgage securitization fees (577) (125) - (702)

Cash flow hedges - - (107) (107)

Other 258 96 - 354

16,903 5,289 (107) 22,085

(*) Other comprehensive income

n z n


y

Non-capital losses available for carryforward 14,915 (4,820) - 10,095

Allowance for impaired loans 1,355 1,232 - 2,587

Employee future benefits 3,490 (256) 25 3,259

Other accrued expenses 411 (77) - 334

Property, plant and equipment 2,451 1,425 - 3,876

Fair value adjustments on acquisition (3,110) 1,331 - (1,779)

Deferred expenses (1,059) (47) - (1,106)

Financial instruments adjustments (36) (8) - (44)

Mortgage securitization fees (408) (169) - (577)

Other 207 51 - 258

18,216 (1,338) 25 16,903

(*) Other comprehensive income



h n The Credit Union ensures that the investment positions in the defined benefit pension plans are managed within an asset-liability matching (ALM) framework that has been developed to achieve long-term investments that are in line with the obligations under the pension plans. The Credit Union has not changed the processes used to manage its risks from the previous period. The Credit Union uses dynamic de-risking in DB1. Although derivatives are permitted, the Credit Union does not currently use derivatives to manage its risk. Investments are well diversified, such that the failure of any single investment within an investment fund would not have a material impact on the overall level of assets. The largest proportion of assets is invested in equity funds, although the Credit Union also invests in bond funds and balanced funds. It is management’s view that equity funds offer the best returns over the long-term with an acceptable level of risk. The target is to hold 17% of the assets in Canadian equity funds, 33% in foreign equity funds, and the remaining 50% in balanced funds.

Contributions for 2014 are anticipated to be approximately $2,518,700 for defined benefit pension plans, $3,424,612 for defined contribution plans and $228,500 for other employee benefit plans.

y n y The following table outlines the key weighted-average economic assumptions used in measuring the accrued benefit obligation:

A n n

(thousands of Canadian dollars) n n y

n

Discount rate (%) Impact of: 1% increase ($) (7,701,600) (815,400)

1% decrease ($) 8,916,400 1,023,400 Rate of compensation increase (%)

Impact of: 1% increase ($) 209,000 N/A 1% decrease ($) (209,000) N/A Pension growth rate (%)

Impact of: 1% increase ($) 6,331,500 N/A 1% decrease ($) (6,259,700) N/A

Life expectancy

Impact of: 1 year increase ($) 786,900 288,900 1 year decrease ($) (797,100) (302,400) Assumed overall health care cost trend rate

Impact of: 1% increase ($) N/A 1,040,500 1% decrease ($) N/A (849,300) Medical benefits claim rate (%)

Impact of: 1% increase ($) N/A 924,800 1% decrease ($) N/A (751,900)

The above sensitivity analyses are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur, and changes in some of the assumptions may be correlated. When calculating the sensitivity of the defined benefit obligation to significant actuarial assumptions the same method (present value of the defined benefit obligation calculated with the projected unit credit method at the end of the reporting period) has been applied as when calculating the pension liability recognized within the consolidated balance sheet. The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to the previous period.



h (

(number of shares)

h v y”

A h

A

A

A

r

b

y 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

Shares issued to (redeemed by) new Members

- - - - - 11,160

Shares issued as dividends 2,468,164 1,638,507 152,796 2,062,030 3,114,369 -

59,206,475 41,237,201 3,496,302 53,705,692 69,454,735 1,290,336

(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 2013 for the year end December 31, 2012 amounted to $2,692,468 (2012 - $2,581,698), of which $2,468,164 (2012 - $2,359,708) 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%. 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 2013 for the period ended September 26, 2013 amounted to $1,782,893 (2012 - $1,711,362), of which $1,638,507 (2012 - $1,586,522) 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.



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 2013 for the year ended December 31, 2012 amounted to $158,679 (2012 - $151,712), of which $152,796 (2012 - $146,468) 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%. 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 2013 for the period ended December 11, 2013 amounted to $2,325,428 (2012 - $2,235,616), of which $2,062,030 (2012 - $1,993,479) 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 2013 for the year ended December 31, 2012 amounted to $3,812,466 (2012 - $3,648,162) of which $3,114,369 (2012 - $2,871,306) 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 263,093 Members at December 31, 2013 (2012 – 262,379). 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.



n nu R n y 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.


nu

v

y v n

v

Bill Maurin, Acting CEO and Chief Financial Officer 416,654 231,000 52,857

Jennifer Rowe, Chief Marketing Officer 262,540 217,681 43,483

Bill Whyte, Chief Member Services Officer 262,309 162,267 46,406

Gary Genik, Chief Information Officer 279,760 136,313 52,455

Anne-Marie Dunn, Acting Chief People Services Officer & VP People Strategy & Performance

208,983 90,455 36,473

The annual premium paid to the DICO for insuring Members’ deposits during the year ended December 31, 2013 was $5,716,420 (2012 - $5,240,974). 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 $3,999,669 (2012 - $3,877,173). These fees were primarily in respect of Membership dues, banking and clearing, and other services.

n nc n 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 Risk Committee and charged it with the responsibility for, among other things, the development and monitoring of risk management policies. The Risk Committee reports regularly to the Board on its activities.

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 Risk Officer (“CRO”), Chief Executive Officer (“CEO”) and, where appropriate, to the Risk Committee of the Board, dependent on credit exposure level and restricted party transactions;



31.1 k nu (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 Risk 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. 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 64% (2012 - 61%) 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.



31.1 k nu 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 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. 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.



31.2 t k n

,

(thousands of Canadian dollars) V h

y v y

n

Cash and cash equivalents 108,399 37,839 - - 22 146,260 Yield 0.81% 1.58% - - - 1.01% Investments - other loans and receivables - 262,260 503,346 - 4,531 770,137 Yield - 1.84% 1.90% - - 1.87% Loans to Members 2,993,165 1,109,055 3,902,825 33,241 62,448 8,100,734 Yield 3.98% 4.04% 3.71% 4.42% - 3.83% Derivative financial assets 23,984 - - - - 23,984 Yield - - - - - - Investments available for sale - - - - 51,762 51,762 Yield - - - - - - Other assets - - - - 90,821 90,821 Yield - - - - - -

3,125,548 1,409,154 4,406,171 33,241 209,584 9,183,698

b ’ y Members’ deposits 2,187,565 2,195,093 2,139,107 - 885,714 7,407,479 Yield 0.98% 2.36% 2.52% - - 1.72% Borrowings - - - - 1,812 1,812 Yield - - - - - - Payables and other liabilities - - - - 38,515 38,515 Yield - - - - - - Mortgage securitization liabilities - 44,604 1,070,248 - - 1,114,852 Yield - 1.68% 2.01% - - 2.00% Derivative financial liabilities 282 - - - - 282 Yield - - - - - - Other liabilities and Members’ equity - - - - 620,758 620,758 Yield - - - - - -

y 2,187,847 2,239,697 3,209,355 - 1,546,799 9,183,698

c n Fixed pay swaps 100,000 - (100,000) - - - Yield 1.22% - 2.04% - - -

n n y i n 1,037,701 (830,543) 1,096,816 33,241 (1,337,215) -



31.2 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, 2013 and December 31, 2012, 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, 2013 and December 31, 2012, 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 liquid assets as a percentage of Members’ deposits and specified borrowings. The Credit Union does not include investments that are held for eventual sale to CHT for reinvestment purposes as liquid assets, which are otherwise composed of cash deposits and investments that are readily convertible to cash in the open market with little or no risk of loss. 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 minimum operating 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, 2013, the Credit Union’s liquidity ratio was 9.24% (2012 – 12.13%).



31.3 i y k c 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.

, (thousands of Canadian dollars)

y

v y

Cash and cash equivalents 126,275 20,077 - - - - 146,352 Receivables 3,133 - - - - - 3,133 Investments - other loans and receivables 12,148 270,623 338,805 167,624 - 1,167 790,367 Loans to Members 517,675 2,480,061 2,953,524 2,749,707 48,831 - 8,749,798 Investments available for sale - - - - - 51,762 51,762

659,231 2,770,761 3,292,329 2,917,331 48,831 52,929 9,741,412

Members’ deposits 3,174,663 2,126,165 2,034,148 202,735 - - 7,537,711 Payables and other liabilities 57,200 - - - - - 57,200 Current income taxes payable 2,197 - - - - - 2,197 Mortgage securitization liabilities 1,686 64,367 517,672 602,259 - - 1,185,984

i 3,235,746 2,190,532 2,551,820 804,994 - - 8,783,092

(2,576,515) 580,229 740,509 2,112,337 48,831 52,929 958,320

, (thousands of Canadian dollars)

y

y

v y

Cash and cash equivalents 404,537 - - - - - 404,537 Receivables 3,228 - - - - - 3,228 Current income taxes - 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

nc 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

(2,033,817) 1,093,115 118,877 1,591,828 8,182 49,910 828,095



31.3 i y k c

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


t

y

y

Equity index-linked options 148 12,341 9,438 1,502 - 23,429 Gross-settled forward exchange contracts: Outflow (1,316) (4,435) - - - (5,751) Inflow 1,313 4,427 - - - 5,740 Interest rate swaps Outflow - (551) (791) - - (1,342) Inflow - - - 2,021 - 2,021

145 11,782 8,647 3,523 - 24,097

,


h t

h

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

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.



31.4 v i n

v. The estimated fair value of fixed rate loans is determined by discounting the expected future cash flows of these loans at current market rates for products with similar terms and credit risks. Historical prepayment experience is considered along with current market conditions in determining expected future cash flows. In determining the adjustment for credit risk, consideration is given to market conditions, the value of underlying security and other indicators of the borrower’s creditworthiness.

vi. The estimated fair value of derivative instruments is determined through valuation models based on the derivative notional amounts, maturity dates and rates and a credit valuation adjustment is applied to account for counterparty and the Credit Union’s own credit risk.

vii. The fair values of other liabilities are assumed to approximate their carrying values, due to their short-term nature. 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.

(thousands of Canadian dollars) v l v

ur

Cash 108,227 - -

Derivative financial assets:

Equity index-linked options - 23,258 -

Interest rate swaps - 433 -

Foreign exchange contracts - 293 -

Investments available for sale - 30,680 -

108,227 54,664 -

Embedded derivatives in index-linked deposits - 22,880 -

Derivative financial liabilities:


i b - 23,162 -

(thousands of Canadian dollars) v l v l

v

Cash equivalents - 37,689 -

Investments – other loans and receivables - 768,440 -

Loans to Members - - 8,078,100

Member’s deposits - (7,389,877) -

Mortgage securitization liabilities - (1,116,695) -

Membership shares - (6,452) -

The fair values of cash and cash equivalents, receivables, current income taxes receivable, payables and other liabilities and employee obligations approximate their carrying values due to their short-term nature.

The fair value of Central 1 Class E shares, which are classified as investments available for sale and measured at cost, has been excluded from the above table as they are not quoted in an active market and their fair value cannot be reliably determined.



31.4 v i n

(thousands of Canadian dollars) v l v

c m ur

Cash and cash equivalents 259,734 130,873 -

Derivative financial assets:

Equity index-linked options - 22,692 -

Foreign exchange contracts - 124

Investments available for sale - 27,900 -

259,734 181,589 -

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

Derivative financial liabilities:


i - 22,532 -

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

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, 2013 was $528,810,977 (2012 - $475,882,916). 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. Tier 2 capital as at December 31, 2013 was $75,858,464 (2012 - $70,865,940).



31.5 nu 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 R k

(thousands of Canadian dollars) n

0 604,669 4.00% 6.61% 8.00% 13.44% 0 546,749 4.00% 6.32% 8.00% 12.69%

u z n

The consolidated financial statements for the year ended December 31, 2013 were approved by the Board of Directors on March 12, 2014. Amendments to the consolidated financial statements subsequent to issuance are not permitted without Board approval.

___________________________________ ___________________________________ A c n Chair, Board of Directors Chair, Audit & Finance Committee

2013 Annual Report | The Meridian Team 105

* Credit Union Officer

The Meridian TeamExecutive Leadership Team and OfficersBill Maurin – Acting Chief Executive Officer*

and Chief Financial Officer Gary Genik – Chief Information OfficerJames Millard – Chief People Services OfficerJennifer Rowe – Chief Marketing OfficerBill Whyte – Chief Member Services OfficerSheryl Wherry – Corporate Secretary*

Board of Directors (as of December 31, 2013)

Don Ariss – Chair*Alan CaslinMark KraemerRoss LamontJohn Murphy – Vice ChairRichard OwenTamara PatonColleen SidfordKevin ThompsonKarl WettsteinPhoebe WrightHelen Young

Audit & FinanceRichard Owen – ChairAlan CaslinMark KraemerPhoebe WrightHelen Young

GovernanceDon Ariss – ChairRoss LamontJohn Murphy Colleen Sidford

Nominating Kevin Thompson – ChairMark KraemerRoss LamontKarl Wettstein

RiskColleen Sidford – ChairRichard OwenTamara PatonKarl Wettstein

Human ResourcesJohn Murphy – ChairDon ArissKevin ThompsonPhoebe Wright

2013 Annual Report | Meridian Locations 107

Clarkson Branch Clarkson Crossing Plaza, 970 Southdown Rd. Mississauga, ON L5J 2Y4

Collingwood Branch 171 St. Marie St. Collingwood, ON L9Y 3K3

Courtice Branch 1416 King St. E. Courtice, ON L1E 2J5

Darlington Satellite Branch Holt Rd. S. Main Security Building Lobby Bowmanville ON L1C 3Z8 (Bank at work branch - no public access)

Drummond & Dunn Branch Southway Plaza, 6175 Dunn St. Niagara Falls, ON L2G 2P4

Ellesmere Branch 1501 Ellesmere Rd. Toronto, ON M1P 4T6

Fergus Branch 120 MacQueen Blvd. Fergus, ON N1M 3T8

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

Newmarket Branch (Agency) 70 Davis Dr., Unit#23 Newmarket, ON L3Y 2M7

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 Wa kerton, 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

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

*As of December 31, 2013, Meridian’s total number of Commercial Business Centres was reduced from 8 to 7.

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