2018 Libro Credit Union Year In Review

2018 YEAR IN REVIEW

READY FOR THE FUTURE BUILT ON SUCCESS

Growing prosperity in southwestern Ontario 1 by transforming banking

Contents 3 Our Purpose

13 We Invest in People

4 Message from the CEO and Chair

18 Creating Stronger Communities

7

Owners Choose Libro

20 Our Investments Generate Profit

9

Working Together

24 Purpose into Action 25 Management Discussion and Analysis

10 People Entrust Money to Libro

2

OUR PURPOSE

Purpose Beyond Profit Libro Credit Union is founded on principles, with a Purpose beyond profit. We know prospering together means working together, and helping each other to make the best choices for the future.

In April 2018, we became a certified B CorporationÂŽ reinforcing our belief there is a better way to do business - one that is better for our Owners, our workers, our community and the environment.

In 2018, with the help of more than 105,000 Owners, Libro built on past successes and looked to the future.

In a world of rapid, accelerating change, Libro and its Owners are equipped with the tools and knowledge needed to prosper.

Owners entrust Libro with money, and we use it to earn revenue. It’s then put to work providing the best services and financial coaching, invested in the community or returned to Owners as profit shares.

Everyone benefits, the cycle continues, and the circle expands.

Just as we develop new approaches, try fresh ideas and make good use of digital innovations, we rely on our Purpose and the principles behind it to make sure we all keep thriving together. Our cooperative approach has been keeping us strong for more than 75 years, and that will continue.

It all starts with our Owners!

You choose Libro You receive competitive returns, the best coaching and services and a share of the profits

We work together to help you achieve prosperity

We share our profits with the community through grants sponsorships & partnerships

You entrust your money to us

We invest in people, businesses and organizations in southwestern Ontario

Our investments generate profit Creating stronger communities, job opportunities, and caring for the environment

3

MESSAGE FROM THE CEO

We’re Ready for Change This is an exciting time for Libro Credit Union, and the work completed in 2018 is a major part of preparing for the future.

I’m proud of the successes of 2018, which continued our growth in every possible way, strengthening this credit union and setting out plans to continue to grow. In the years to come, we know smart risks, empowered people and high-quality data will equip us to keep growing as a business, always remembering our social purpose.

The coming months and years will see a pace and extent of change never before experienced in our sector, and Libro is ready. We know our focus on Purpose is vital, and our financial coaching is why Owners will succeed along with us. Our commitment to growing prosperity is all about helping one Owner at a time, as one team with one Purpose.

I know Libro is a successful brand that is known and admired in our communities and I look forward to building on our success together.

Steve Bolton President & CEO, Head Coach 4

MESSAGE FROM THE CHAIR

We’re Staying True to our Roots There’s never been a more exciting time to be involved in the democracy that runs Libro. In 2018, we led a conversation designed to encourage deep connections between Libro and the communities we serve across southwestern Ontario. We are building on our history to run, grow and continue to evolve our business and we’ve identified the strategies we need. Part of that is staying true to our roots in southwestern Ontario, listening to Owners and communities as we reaffirm our commitment to the best advice and service.

Our unique governance structure is an important part of that. In 2018, we began the transition towards a new approach hearing from Owners representing our operating regions, ensuring they can have a clear voice as we meet our business goals. We’re committed to making sure our democratic structure supports strong engagement with Owners, and that sets us up for the speed of change to come in our industry. This is a crucial time in Libro’s history as we meet the challenges of changing technology, population and expectations from the public.

I’m thrilled to be part of this journey.

Gary Baker Chair of the Board of Directors 5

OWNER STORY

OWNER STORY

Cowbell Brewing Co.

“

Let’s raise a glass to award-winning Cowbell Brewing Co. in Blyth, one of the most vibrant businesses in southwestern Ontario - and now a Libro Owner.

These are exciting times in our community and we are pleased to be one part of the economic revitalization underway in Huron County.

LIBRO OWNER STEVEN SPARLING

FOUNDER & CEO OF COWBELL BREWING CO., BLYTH

”

6

In 2018, led by Founder and CEO Steven Sparling, this community leader and his team weighed all their options and switched to Libro.

Shared values was the key: Cowbell cares about the people and the possibilities in its community and its leaders recognized in Libro’s Purpose, a movement they could join while still accessing all the services they need as a business.

OWNERS CHOOSE LIBRO

Owners Choose Libro SOME CHOICES REALLY DO MATTER People are choosing Libro every day, and the credit union is gaining thousands of new Owners every year.

Thank you, from all of us to all of you, for adding your strength to our ability to grow prosperity for all.

The stronger we become together, the more we can work towards our common Purpose.

JOINING LIBRO

NEW OWNERS IN 2018

In 2018, 7,367 new people joined the more than 100,000 who are Libro Owners.

As in past years, more than two-thirds of those new Owners are younger than 50, and we’re thrilled to help them with long-term financial planning. And more than 800 of those new additions to the credit union are business Owners.

SUPPORTING YOUR BUSINESS

BUSINESSES BANK WITH LIBRO

Almost 9,500 businesses choose Libro. That includes farms, entrepreneurs in the ag food chain, social enterprises, community organizations and more. These businesses are vital drivers of the local economy that benefits us all - and we never forget that.

7

LIBRO OWNERS CAITLIN AND SPENCER

OWNER STORY

OWNER STORY

Purdy Natural

“

I switched to Libro because I wanted to feel like I was cared about and that my business was cared about.

LIBRO OWNER ROKHSANA PURDY

OWNER OF PURDY NATURAL, LONDON ONTARIO

”

Rokhsana’s company is dedicated to nourishing skincare and offering the best ingredients available. At Libro, we’re dedicated to making sure entrepreneurs like her have the banking services they need – so they can focus on their own expertise and their passion.

8

WORKING TOGETHER

Working Together GET A PLAN TO GET AHEAD

It seems like a simple idea, but it really does pay off. If we all work together and support each other, then we will all prosper together. Try us.

The first step towards a goal is to make a plan. When you’re new to Libro, your coach invites you in to complete a unique Prosperity Plan that sets out where you’re going. When goals change, we encourage Owners to review their plan and update it because life keeps happening.

When you work with Libro, it’s not a one-off meeting where somebody tries to sell you a product. Instead, it’s just one part of a long-term relationship that benefits us all over time.

You set the goals and make the decisions, with coaching from our experts, in person and using our growing range of digital tools. Once you’re on your way, we stay in touch and help you stay on track. And, if your priorities change, we’re ready for that, too.

In 2018 alone, more than 7,600 Prosperity Plan conversations happened - and every one of them was a move towards someone’s prosperity.

We’re with you for all of life’s milestones.

We’re working hard to make our services fit into busy lives and our high-tech world. Pilot projects in 2018 introduced online appointment scheduling, coaching by video and sharing documents digitally.

Enhancements to our etransfer services made it quicker and simpler to send and receive funds. And we have more to come.

WE’RE MAKING THIS EASIER

IT WORKS FOR OWNERS Part of truly helping Owners is asking how we’re doing, and we keep receiving high scores. In 2018, Owner satisfaction surveys returned a score of 4.46 out of 5. Your voice matters and helps Libro focus on continuous improvement.

7,600

4.46 5 out of

OWNER SATISFACTION

PROSPERITY PLANS IN 2018

9

PEOPLE ENTRUST MONEY TO LIBRO

People Entrust Money to Libro NEW LOCATIONS And we’re thinking differently about the places where we welcome Owners. That means we start solving every problem by thinking of the needs of the people using our services and staying open-minded about how our locations might look. That work has included a new branch in Downtown Kitchener, planned in detail in 2018 and due to open in 2019.

The trust Owners place in Libro is the perfect example of our collective success. In 2018, Libro opened a new building in Exeter and welcomed the community to celebrate. Our roots run deep - we have 31 branches in 25 communities and serve so many more across southwestern Ontario.

LAUNCHING OUR NEW BUILDING IN EXETER

10

STAFF STORY

STAFF STORY

“

Community Connections

I felt so much joy to be at the opening of a new branch in a southwestern Ontario community. Just as we invest in this region, we will continue to work with Libro Owners one-to-one, bringing vital banking services into the community and using them to support and grow prosperity in the community.

TANYA QUIPP

BRANCH MANAGER, EXETER 11

�

PEOPLE ENTRUST MONEY TO LIBRO

How We’re Growing

$

7.7 BILLION TOTAL PORTFOLIO

The success story at Libro Credit Union can be expressed in many ways, including growth. More people are choosing to do more of their business with us, because they trust our approach to doing business and our coaching model.

6.2% GROWTH OVER 2017

$

INVESTING DONE RIGHT

4.6 BILLION

ASSETS UNDER ADMINISTRATION

Good for society. Good for portfolios. Responsible investing has boomed in recent years as investors have recognized the opportunity for better riskadjusted returns, while at the same time contributing to important social and environmental issues.

Libro became a proud member of the Responsible Investment Association (RIA) and has ten Responsible Investment Specialists.

5.3% GROWTH OVER 2017

$

131.9 MILLION INCREASE IN DEPOSITS

4% GROWTH OVER 2017

12

RESPONSIBLE INVESTMENT SPECIALISTS

WE INVEST IN PEOPLE

We Invest in People PEOPLE ARE AT THE CENTRE OF OUR SUCCESS

LIVING WAGE COMMITMENT As a proud B Corp, Libro continues to put our values into action by ensuring all staff are compensated at or above the highest Living Wage across our region’s communities. Living Wage is an hourly wage that enables employees and their families to meet their basic needs, such as food, clothing, shelter, transportation and childcare. It reflects what two earners in a family with two children need to earn, based on the actual costs of living in a specific community. The highest living wage in our area increased to $17.44 late in 2018.

Libro is proud to now be a Certified B Corporation® (B Corp™), joining leaders of a global movement of people using business as a force for good™. B Corps are important because they work to redefine business.

They inspire businesses to compete not only to be the best in the world, but to be the Best for the World®.

The performance standards that B Corps meet are comprehensive, transparent and third-party verified. They measure a company’s impact on all of its stakeholders (e.g. staff, community, Owners, suppliers and the environment). B Corp certification is to a whole business’s operations what Fair Trade certification is to coffee.

I’m surrounded by like-minded people who are always available to provide advice and feedback and are eager to help me set and reach goals for self-improvement.

Libro is one of my happy places.

KAROLYN FOURNIER BEECHWOOD BRANCH REGION OF WATERLOO

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WE INVEST IN PEOPLE

GREAT PLACE TO WORK magazine in late 2018. One of four winners in the large business category, the credit union won the accolade because staff gave positive feedback to the survey conducted by Carswell Partners Inc.

For four years in a row, Libro has been one of Aon Hewitt’s Platinum Level Best Employers in Canada.

How do we keep winning? It’s all about exceptionally strong performance in employee engagement, leadership, culture and more.

These awards are thanks to the Libro philosophy of building relationships and planning for the long-term.

It’s an organization that invests in people, offering career development opportunities and an attractive compensation package.

Libro was also named one of London’s 2019 Best Places To Work, a new award launched by London Inc

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WE INVEST IN PEOPLE

CELINE MOREAU OF CTV VISITED TO HELP US TELL THE LIBRO STORY

LIBRO CULTURE We have 680 staff and we aim to help them all stay engaged and joyful in their work. Libro’s positive culture is at the heart of our day-to-day work. We’re committed to providing staff with positive career development opportunities, focusing on filling positions internally wherever possible, while still bringing fresh talent into the company.

GENDER DISTRIBUTION SENIOR LEADERSHIP

33% FEMALE

67% MALE

MANAGERS AND SUPERVISORS

24%

76%

MALE

FEMALE

680

EMPLOYEES AT LIBRO

57% 57% OF ALL POSITIONS WERE FILLED INTERNALLY IN 2018

YEARS OF SERVICE

STAFF

78% FEMALE

20+

106 EMPLOYEES

BOARD MEMBERS

22% MALE

55%

45%

MALE

FEMALE

10+

183 EMPLOYEES

42.5

15

%

THAT’S 289 EMPLOYEES WITH A TENURE OF MORE THAN 10 YEARS – 42.5%

WE INVEST IN PEOPLE

Much of the success of a credit union’s cooperative approach is in the way we put money to work. A big part of that is accepting deposits, then making money available to Owners in loans – and that side of our business is seeing healthy growth.

308 MILLION

$

TOTAL LOAN GROWTH IN 2018

30

%

34

%

RETAIL

AGRICULTURE

36

%

COMMERCIAL

3.41 BILLION

$

MADE AVAILABLE TO OWNERS AS LOANS

16

LIBRO OWNERS MARK, FRANK, JEFF AND LIBRO COACH MATT

OWNER STORY

OWNER STORY

McIntosh Farms Butcher Shop

“

Libro has been there for us every step of the way. Helping us to pick the accounts to fit our needs, accounts to help us reach our long-term goals. We chose Libro because of their support of our community and because of their reputation for supporting small businesses. Thank you Libro for giving our small business a great start!

LIBRO OWNER ERIN MCINTOSH

”

OWNER OF MCINTOSH FARMS BUTCHER SHOP, LISTOWEL

Libro is helping spark growth in the economy and create jobs by assisting entrepreneurs across southwestern Ontario turn their ideas into reality. Through partnerships like the one through the Listowel Business Improvement Association’s Win this Space Program, Libro has helped businesses get a leg up by accessing financial support to put toward commercial rental space. Additional benefits included business mentorship, free local advertising, internet service and no-fee banking at Libro.

17

CREATING STRONGER COMMUNITIES

Creating Stronger Communities

852

ENTREPRENEURS SUPPORTED

LIBRO CLUSTER Libro was recognized by the Canadian Credit Union Association for its approach in bringing together community partners that are growing the economy in southwestern Ontario, referred to as the Libro Cluster.

These partnerships are creating social and economic impacts; creating jobs, supporting self-employment and entrepreneurship and building money smarts.

The Libro Cluster is a plan that looks beyond traditional granting.

It allows Libro to convene partners working toward similar aims.

205

BUSINESSES STARTED

370

JOBS CREATED

LIBRO CREDIT UNION WINS THE CANADIAN CREDIT UNION ASSOCIATION NATIONAL AWARD FOR COMMUNITY ECONOMIC DEVELOPMENT.

18

12

ECONOMIC DEVELOPMENT RESEARCH PROJECTS STARTED

CREATING STRONGER COMMUNITIES

VOLUNTEERING When we combine the passion of Libro’s epic humans with the resources of our credit union to make a difference in our communities, amazing things can happen. Libro staff amplify our impact by giving their time, effort and talents and getting involved to benefit our communities.

8,997 VOLUNTEER HOURS

EXPANDING FINANCIAL LITERACY Libro has supported Each One Teach One, a volunteer program that teaches people money skills, since 2016. to date, 49 Libro staff have become Each One Teach One Trainers. In 2018, 38 workshops were held across our region, helping 499 people gain important financial literacy skills.

ENVIRONMENT Libro recognizes that strong communities include a healthy environment. As a proud B Corporation Libro is working to reduce our environmental footprint. One way we do this is by printing less. 74,562 Libro Owners have chosen to receive paperless statements, saving 11,362 kg of paper. This represents 202,706 kg of greenhouse gas emissions avoided, the same as removing 43 cars from the road for one year.

49

LIBRO STAFF ARE EACH ONE TEACH ONE TRAINERS

AN EVOLVING DEMOCRACY In 2018, we began a move towards a regional structure in our governance. That changes the way Owners choose the Owner Representatives who act as advocates for our grass-roots communities as Libro plans for the future, keeping a local link while creating a more streamlined approach. In January 2019, the governance model transitioned from 31 branch councils to 10 regional councils.

AWARD-WINNING YEAR In addition to being recognized for the social and economic benefits the Libro Cluster programs are creation, we are proud to have received awards for the tremendous work our staff has done in improving our Owner’s experience and engagement online through our website and marketing campaigns.

We are excited that Libro Credit Union is among the credit unions recognized for exemplifying the true nature of the cooperative spirit.

19

11,362 KG OF PAPER SAVED

OUR INVESTMENTS GENERATE PROFIT

Local investment strengthens our region We’ve updated our investment policy to align our values with our investments and participate in initiatives that provide a measurable social, environmental and financial return. This update will build a portfolio of impact assets and investments of approximately 4.36 million, or 1% of our investment pool. As for the rest of Libro’s financial strength, we work on the principle that we should reinvest as much as possible in southwestern Ontario, supporting the area’s business and individuals whenever we can.

Some of the dollars from the Breakthrough Fund are being used to construct 69 affordable housing units in downtown London (Woodfield Gates), 10 of which will be reserved for the Canadian Mental Health Association.

Our first investment in the Verge Breakthrough Fund focuses on supporting affordable housing developments, community real estate and social enterprises.

And it’s all due to people entrusting money to Libro, because those relationships generate the revenue that we are putting to work in the right ways.

We have a Purpose beyond profit, and while profit alone is not the end goal, it’s an important part of the equation. When our business prospers so does our community.

WOODFIELD GATES, AFFORDABLE HOUSING DEVELOPMENT, 356 DUNDAS STREET, LONDON

20

PHOTO CREDIT: NATIONAL HOUSING STRATEGY

OWNER STORY

OWNER STORY

“

Personal Connections

Our caring Libro coaches over the last 38 years have worked with us through the ups and downs as we raised our kids, welcomed our grandchildren and eventually moved into retirement. Reassurance, commitment and friendship come to mind when we think of the Libro staff that has helped us over the years, from the greeter to the tellers to the coaching staff. To bank at a place that puts people first and even shares the profits each year with owners like us makes it even more special.

We have always viewed the bonus of profit shares each year as ‘fun money’. A mini vacation getaway on Libro is something we value as we watch our profit shares build each year. How wonderful is that?

KAREN ZELEZNIK

RETIRED LIBRO FINANCIAL PLANNER

21

”

OUR INVESTMENTS GENERATE PROFIT

Our Investments Generate Profit We do business with a Purpose, and that’s good business. Our success measures include the profits we make, because every dollar we make can be put to work growing prosperity. We do it efficiently, with

high standards of financial performance and a robust budgeting process. And it’s all about putting that money back into southwestern Ontario in healthly ways, such as profit shares for Libro Owners.

79.2%

18.5 MILLION

$

EFFICIENCY RATIO

NET INCOME BEFORE PROFIT SHARING AND TAXES

3% IMPROVEMENT OVER 2017

That’s a rating based on how many dollars we spend to earn revenue. In 2018, we spent 79 cents to earn every dollar of revenue.

INCREASED 19.9% OVER 2017

WE SHARE OUR PROFIT

$

COMMUNITY INVESTMENT Focusing on economic development, money smarts and youth leadership in our region, we reinvested $1.5 million into our communities through sponsorships, donations, student awards, our strategic partnerships and the Libro Prosperity Fund.

6.9 MILLION CLASS P PROFIT SHARING AND DIVIDENDS

+ $ 4.7 MILLION CLASS I INVESTMENT SHARE DIVIDENDS

$

= $ 11.6 MILLION

1.5 MILLION REINVESTED BACK INTO COMMUNITIES

DIRECTLY RETURNED TO OWNERS

22

COMMUNITY STORY

COMMUNITY STORY

“

Community Investment

The grant money is helpful, but the real value for me was the mentorship; the incredibly knowledgeable, very approachable people offering invaluable advice. Being part of the Libro Social Innovators Program was such an accelerant for me to progress and hit – or in my case, shatter – my goals!

DANE FADER

ENVIRONMENTALIST, ENTREPRENEUR, AND FOUNDER OF GREENER BINS

”

Libro is inspiring positive change in our communities with the Libro Prosperity Fund, a half-million dollar annual granting program, and partnerships with local organizations who focus on economic development, youth leadership and money smarts.

23

Through programs like the Libro Social Innovators at the University of Windsor EpiCentre, individuals with an idea receive support to start, build and sustain new enterprises. Mentorship, business coaching, and experiential learning are all part of this process. Libro’s investment in community includes sharing all resources – money, time, skills, and passion.

PURPOSE INTO ACTION

Putting Purpose into Action And we come right back to that important message of Purpose beyond profit, because it’s important. As a Certified B Corporation®, driven by democratic principles, with a focus on advice, service and community, Libro is looking to 2019 and beyond with plans to expand. We have 31 locations and more to come.

The future is challenging and filled with promise. Libro is ready for it.

It all starts with our Owners!

You choose Libro

If you’re not currently a Libro Owner, take a look at libro.ca to find out how to join. libro.ca • 1-800-361-8222

Coming in 2019

Downtown Kitchener Branch

MORE DIGITAL INNOVATION

THOUSANDS MORE COACHING CONVERSATIONS

24

GROWING PROSPERITY IN SOUTHWESTERN ONTARIO

Management Discussion and Analysis A Deeper Look at Libro 26 2018 Financial Overview

29 Capital Liquidity Management

26 Financial Performance Summary

29 Enterprise Risk Management

28 Financial Position Summary

31 2019 Economic Outlook

25

MANAGEMENT DISCUSSION & ANALYSIS

2018 FINANCIAL OVERVIEW

This financial performance took place during a year where the Canadian economy continued to operate close to its potential against the backdrop of significant uncertainty due to trade negotiations with the United States. The Bank of Canada (BoC) raised its overnight rate by 25 basis points in October to 1.75%, the fifth rate hike in 15 months. The rate increases were required to achieve their inflation target and reduce monetary stimulus. The signing of Canada-United States-Mexico agreement (CUSMA) is likely to support a rebound in business investment after a decline this summer due to uncertainty over the future of NAFTA.

3.9 BILLION

$

TOTAL ASSETS

GROWTH OF 6.4%

7.7 BILLION

$

The unemployment rate in southwestern Ontario trended down throughout the year, ending at 5.6% in December. As the employment picture has improved, more people are joining the labour market. However, the job market remains tight and filling vacant positions can be a challenge for employers.

TOTAL PORTFOLIO GROWTH OF 6.2%

18.5 MILLION

$

In the housing market, sales and new listings were both lower in 2018. Market supply remained tight throughout the year, but increases in the average sale price leveled off over the past few months. Changes to residential mortgage regulation are having the effect of suppressing demand, and it is expected that housing demand will remain in a lower range in the near-term.

NET INCOME (PRE-DISTRIBUTIONS AND TAX) INCREASE OF 19.9%

Libro operated well in 2018, focused on strategic initiatives that grow our Owners’ prosperity and ensure our success. Libro ended the year strong with a net income, before distributions and tax, of $18.5 million, ahead of target, and a 19.9% increase over 2017. This was driven by strong loan growth, improved net interest margins, and managing operating costs.

Agriculture and business Owners were challenged in 2018 due to uncertainty caused by the negotiations of the new CUSMA, as well as environmental issues.

Overall, in Ontario, farm profitability is being squeezed by lower prices and rising operating expenses, but net farm income remains positive.

Reflecting on growth in 2018, Libro ended the year with total growth of $447.7 million or 6.2%, and a total yearend portfolio of $7.7 billion. Loan growth performance was strong throughout the year at 9.9%, just shy of our 10% target. However, deposit growth was challenged and less than expected at 4%, compared with our 8% target. Given loan growth outpaced deposit growth, Libro increased our securitization utilization throughout the year.

FINANCIAL PERFORMANCE SUMMARY Net Interest Income

Net interest income is the largest component of revenue for Libro. It represents interest earned from Owners on loans and our investment portfolio, less interest paid to Owners on their deposits and investment shares, and interest paid on debt obligations. In 2018 Libro continued to experience an improvement in net interest margin as a result of strong loan growth and three increases in the BoC’s overnight target rate. The increase in rates resulted in higher yields across our loan portfolio, and when

Total assets grew by 6.4%, ending the year at $3.9 billion.

26

MANAGEMENT DISCUSSION & ANALYSIS

combined with the strong loan growth, the result was an increase in interest income of $20.1 million or 17.2%. Interest expenses increased by $7.8 million or 18.6% from 2017, primarily due to higher interest rates during the year, as well as increased utilization of securitization in 2018. For the year, net interest income was $86.8 million, an increase of $12.2 million or 16.4% over 2017. Net interest income as a percentage of average assets rose to 2.35%, from 2.14% in 2017.

IFRS 9 applied during 2018.

The provision for credit losses in 2018 was $3.4 million, $1.7 million higher than 2017. On a portfolio percentage basis, the 2018 provision for credit losses increased to 9 basis points, from 5 basis points in 2017. The provision for credit losses represents management’s best estimate of potential loss during the year after carefully assessing the overall portfolio and individually reviewing impaired loans.

Libro securitizes a portion of its loan volumes through Canada Mortgage and Housing Corporation sponsored programs. This is used by Libro to access cost-effective funding to supplement growth and to manage liquidity. At the end of 2018, Libro had securitized consumer mortgage loans of $77.7 million, up from $10.3 million in 2017.

Operating Expenses Operating expenses in 2018 were $83.5 million, an increase of $4 million or 5% over 2017. Throughout the year, we continued our commitment to our strategic initiatives to position Libro for future growth and success. Key components of operating expenses include salaries and employee benefits, general and administrative, marketing and business development, systems and technology and occupancy.

Non-Interest Income Non-interest income includes income from service fees, commissions from mutual funds and insurance, foreign exchange, income from property, and mark to market valuation adjustments on investments and interest rate swap agreements. Libro has invested in a new and improved suite of credit card products and is leveraging a new wealth management platform through Aviso Wealth. Total non-interest income was $18.7 million in 2018, a decrease of $3.4 million from 2017. The mark to market valuation on interest rate swaps was a loss of $66 thousand for 2018, compared with a $3.5 million gain in 2017. Removing the noise of the large swings due to valuation gains and losses, non-interest income increased by 1% or $178 thousand compared to 2017.

Operating expenses as a percentage of average assets decreased to 2.26% in 2018. This ratio has continued to decline since 2015, which demonstrates our focus on managing operating expenses and focusing on strategic initiatives that improve our competitiveness.

Libro continues to focus on managing costs to ensure our operations are as efficient and effective as possible while still making the necessary investments to grow the business.

OPERATING EXPENSES % of Average Assets 2.56%

Credit Loss Provision Effective January 1, 2018, Libro adopted IFRS 9, Financial Instruments (IFRS 9). IFRS 9 introduces a new expected loss impairment model, which replaces the existing incurred loss impairment model under IAS 39.

IFRS 9 does not require restatement of comparative period financial statements. Libro has recorded the measurement differences between the previous carrying amounts and the new carrying amounts on January 1, 2018, through an adjustment to opening retained earnings, net of deferred tax implications.

Refer to Libro’s 2018 Annual Financial Statements and the accompanying notes for accounting policies under

2.46%

2.28%

2015

27

2016

2017

2.26%

2018

MANAGEMENT DISCUSSION & ANALYSIS

FINANCIAL POSITION SUMMARY

Net Income Net income (before profit sharing and taxes) was $18.5 million, an increase of $3.1 million or 19.9% over 2017. Total revenue from operations increased by $8.8 million or 9.1% compared with 2017. Revenue growth was strong in both net interest activities and investment income thanks to an improved financial margin. Although our total expenses increased in 2018, the rate of expense growth at 5% was lower than our rate of revenue growth for the year.

Total on-balance sheet assets grew by $232.7 million to $3.9 billion in 2018 compared to $3.6 billion in 2017.

Total loans increased by $308.4 million or 9.9%, just shy of our 10% target. Loan growth was largely driven by significant increases in our commercial and agricultural portfolios, growing by 13%. Libro continues to increase market share in residential mortgages, growing by 8.3%. Total loans to Owners was $3.4 billion at the end of 2018.

NET INCOME

Deposits grew by $131.9 million or 4%, less than our 8.3% target due to an increasingly competitive deposit environment. New deposits were split between demand and term products. Owners’ deposits increased to $3.4 billion at the end of 2018.

In Millions

18.5 15.5

8.6

DEPOSITS & LOANS In Millions

2.2

3,411 3,279

2015

2016

2017

2018

3,045

The operating efficiency ratio is calculated by dividing operating expenses by revenue. A lower ratio indicates a more efficient business operation. In 2018, operating efficiency was 79.2% compared to 82.2% in 2017. Libro continues to focus on improving efficiency by growing organically and gaining the benefits of our scale.

2,821

2015

93.9% 2.56%

2017 2017

Deposits Loans 2016

2017

2018

Libro’s off-balance sheet assets consists of our wealth portfolio, which is comprised largely of mutual fund assets held by Owners. Owner balances at December 31, 2018 were $734.6 million, down from $738.4 million in 2017. Although mutual fund sales continue to be positive, these assets under administration are carried at their market value and have been impacted by the decline in equity markets near the end of 2018.

2.46% 87.7%

2016 2016

2,933

Libro securitized loans to raise additional funding at attractive market rates. During 2018, securitization debt obligations increased by $67.4 million.

% of Average Assets

2015 2015

3,106

2,711

OPERATING EXPENSES EFFICIENCY

82.2% 2.28%

3,414

2.26% 79.2% 2018 2018

Total assets under administration were $4.6 billion at December 31, 2018, up $228.8 million or 5.3%.

28

MANAGEMENT DISCUSSION & ANALYSIS

CAPITAL AND LIQUIDITY MANAGEMENT

key risks that may materialize during the course of business. Libro’s growth projections, current assetliability management risk measurement techniques, and the capital impact from various stress testing scenarios have been utilized to determine capital requirements.

Capital Management

Libro’s capital management objectives are to maintain appropriate capital levels to ensure compliance with regulatory requirements under current and projected economic conditions, and to provide an appropriate cushion to ensure its ongoing stability. The principles and key elements of Libro’s capital management framework are outlined in the Board Capital Management Policy.

Liquidity Management Libro carefully manages its liquidity to ensure that Owners’ requirements are met at all times. By ensuring that sufficient, readily accessible or liquid assets are available, Libro is able to meet Owner demand for withdrawals and deposit redemptions, fund loans and business operations. Libro must meet the liquidity requirements outlined in the Act and the related liquidity requirement regulations. Generally, Libro targets liquidity levels in the 9% to 11% range.

Libro’s regulatory capital ratios are strong and well above the requirements of the Credit Unions and Caisses Populaires Act, 1994 (the “Act”), and Ontario Regulation 237/09. Libro’s capital adequacy ratio was 8.17% as of December 31, 2018, (7.99% at the end of 2017), and in excess of the 4.0% stipulated in the Act. Libro’s risk weighted capital adequacy ratio was 12.6% at the end of 2018, (12.76% at the end of 2017), and well in excess of the 8.0% stipulated in the Act. In addition, Libro’s capital quality also exceeds regulatory minimum requirements. Total regulatory capital at the end of 2018 was $314.7 million ($289.1 million at the end of 2017).

CAPITAL ($000)

2018 8.17%

7.99%

12.60%

12.76%

Total Tier 1 Capital

301,019

283,129

Total Tier 2 Capital Total Regulatory Capital

Libro continues to participate in securitization programs issuing mortgage-backed securities and participating in the Canada Mortgage Bond program.

This is used by the credit union to access cost-effective funding and to manage liquidity risk, credit risk and interest rate risk.

2017

Risk Weighted Ratio

Leverage Ratio

Libro’s liquidity ratio was 10.41% at December 31, 2018, compared with 13.03% at December 31, 2017. The combination of strong increases in lending volumes, net of the increase in our Owners’ deposits, resulted in the decrease in the liquidity ratio in 2018.

13,730

5,982

314,749

289,111

Libro maintains a borrowing facility with Central 1 Credit Union. Libro can draw on these facilities as required to finance operations. Our credit lines provide borrowing capacity of approximately 2.3% of credit union assets (2.5% in 2017).

Internal Capital Adequacy Assessment Process Libro annually performs an Internal Capital Adequacy Assessment Process (ICAAP), in line with Deposit Insurance Corporation of Ontario (DICO) requirements.

The ICAAP ensures that Libro has adequate capital in relation to its risk profile, has a strategy for maintaining its capital levels, and develops and employs appropriate risk management techniques. Libro’s ICAAP naturally aligns with the strategic planning process and the Enterprise Risk Management (ERM) program to ensure that enough capital is set aside for ongoing operations, future development, and any

ENTERPRISE RISK MANAGEMENT Overview Libro recognizes that managing risk, not avoiding risk, is required to operate a successful financial institution.

We consider risks from the perspective of living our values and fulfilling our business objectives as expressed through our strategic business plan. Libro’s Board of Directors and all employees are responsible for ensuring that the risks to which we are exposed are aligned to the Board-approved risk appetite.

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MANAGEMENT DISCUSSION & ANALYSIS

Risk Governance Model Libro operates within a Three Lines of Defence model to help provide a consistent, transparent, and clearly documented allocation of accountabilities and segregation of functional responsibilities. This segregation of responsibility helps to establish a robust control framework and encourages the continuous improvement of risk management at Libro.

A clear risk appetite enables Libro to make better strategic and tactical decisions on a risk-reward basis with consideration for its capacity to manage associated risks. We use our ERM framework to consider risk in decision-making and ensure that the risk exposures for Libro are mitigated effectively.

Risk Principles & Culture Libro’s risk-management culture is embedded throughout the organization. Employees at all levels of the organization share a common risk philosophy.

Every employee is accountable for achieving the best results for his or her business unit and for Libro as a whole. Business decisions are made at all levels of the organization and every team member has a role in managing risk, including identification, communication and escalation of risk concerns. Libro applies seven key principles to how risk is managed for our credit union.

1. Libro’s business units form the First Line of Defence, performing daily risk management activities.

2.

Risk and compliance functions form the Second Line of Defence, providing oversight and offering independent, effective challenge to first line risk management actions.

3. Internal Audit forms the Third Line of Defence, providing independent, objective assurance to the Board of Directors.

Risk governance also includes determining an appropriate organizational structure, and clearly defining authority and responsibility for risk decisions.

The following groups and committees have the authority and responsibility to make risk decisions within Libro.

Create a risk aware culture

Reinforce that risk is a lens we use to look at our business

Board of Directors

Be consistent with our principles based approach

Audit & Risk Committee

Governance Committee

Pension Committee

Loans Committee

Human Resources Committee

Executive Leadership

Use clear language that all staff understand

Executive Risk Committee

Credit Risk Management Committee

Asset Liability Committee

Risk & Corporate Services

Ensure we’re not complicating our business

Operational Risk

Credit Risk

Regulatory Compliance

Internal Audit

All Employees

Provide comfort to the Board that we’re “in-control”

Easily meet regulatory requirements 30

Strategic Risk

Financial Risk

Credit Risk

Operational Risk

Regulatory Risk

Technology Risk

MANAGEMENT DISCUSSION & ANALYSIS

2019 ECONOMIC OUTLOOK

In the agricultural sector, grain and seed prices are expected to continue to fall to near their historic lows. However, long-term there are more factors supporting demand growth than supply growth, which will support higher prices. The structure of the supply management system was upheld in the CUSMA agreement, though a fixed amount of market access was granted. Market growth is projected to outpace the increased level of imports which will retain profitability in supply managed sectors. Investment in dairy processing facilities is likely to halt due to the elimination of Class 6 and 7 milk pricing.

The Canadian economy has been operating near its capacity for over a year now, unemployment is at its lowest in decades, and inflation is on target. However, there are growing concerns of a global economic slowdown. Overall Canadian GDP growth in 2018 is around 2%, but most forecasts are calling for a moderation of Canada’s economic growth in 2019 and 2020. Slower growth is not a cause for concern and it would only bring our economy back to a sustainable growth track. The main risk we see to the outlook today is ongoing trade tensions between the United States and other countries, particularly China. Any further interest rate increases by the Bank of Canada are expected in 2019 when conditions and prospects improve.

Libro is well positioned for the future, reflected in our strategic 10-year vision and supported by initiatives that will ensure our long-term sustainability and relevance in our sector. We are entering an unprecedented period of change, with the opportunities and challenges presented by our economic and competitive environments, digital advances, and changing customer expectations. Our goal to grow, run, and evolve our business, through a strategic focus on Business Segment Excellence, Digital Delivery, Owner Advice and Coaching, and Owner insights, enforce our commitment to helping our Owners and our Communities grow prosperity.

Ontario’s economic expansion phase is forecast to continue, but growth is expected to slow in 2019.

Lower consumer and residential investment spending will contribute to real GDP growth dropping below 2% in 2019 and 2020. The unemployment rate will remain steady, but income growth is projected to decline from nearly 4% to just under 3%.

Moderate growth in the Ontario housing market is expected due to higher interest rates and modest employment growth. Pent-up housing demand will continue to build and rental markets will remain tight. The commercial real estate outlook in southwestern Ontario remains positive for 2019, with stronger demand in Kitchener-Waterloo than elsewhere in the region.

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