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MILLIONS OF GOOD REASONS
2006 ANNUAL REPORT
REFLECTING OUR COMMUNITIES
The communities currently served by Desjardins, as well as those in which it hopes to broaden their presence, are becomingincreasingly diversified. The position of women, young people and cultural communities in our society today is very differentfrom their status in 1900, when the first caisse was founded in Lévis.
Desjardins has always proven its ability to adapt to change, both as financial institutions and as instruments of communitydevelopment. That is why, as our most recent advertising campaign shows, we want to further embrace this diversity byvaluing people’s differences and by welcoming them.
We believe that embracing diversity can only be a positive thing, both for Desjardins and for its members, clients, officers and employees. This is why, throughout all our components, we seek to uphold and even strengthen this attitude, which willenable us to warmly welcome all our members and, in so doing, help us become an accurate reflection of the society inwhich we live today.
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COMMITMENT TOEVERY SINGLEMEMBER AND CLIENT
Companies nowadays are constantly seeking toimprove the quality of the services they offer theirclients. This objective is even more important in acooperative enterprise such as Desjardins, whoseclients are also, in most cases, its owners. That iswhy service quality is one of the six orientations ofDesjardins Group’s 2006-2008 Strategic Plan.
Since 2002, we have been working steadily tomake our employees aware of how important thisissue is to us. In 2006, we initiated an ongoingimprovement process that would enable us tostrengthen our position as leader in that area, so wecould offer our “millions of good reasons” servicethat meets their expectations as user-owners.
MILLIONS OF GOOD REASONSDesjardins owes its existence to the members who came together to create
their own financial institution that would provide them with the financial
products and services they needed. Since 1900, when the first Desjardins
caisse was founded in Lévis, people from many other communities have
been pooling their resources to set up hundreds more caisses. Over the
years, the caisses have generated sufficient surplus earnings to enable them
to create subsidiaries to meet the increasingly diversified needs of their
members. Today, Desjardins represents an inalienable collective wealth and
forms the basis of the largest cooperative financial group in Canada,
offering its millions of members an extensive range of financial products
and services.
But Desjardins, like the caisses that created it, is more than just a financial
institution. Because of its cooperative nature, it takes an active part in the
economic and social development of the communities in which it operates.
That is why, year after year, the caisses give back a large portion of their
surplus earnings to their members and the community. And it is for the
same reasons that the caisses and their subsidiaries develop and promote
distinctive commercial practices that turn their cooperative values into
concrete action. In other words, Desjardins demonstrates an unparalleled
commitment to the communities it serves.
DESJARDINS, THE LARGESTCOOPERATIVE FINANCIAL GROUP IN CANADA
n Assets of $ 135.1 billion.
n More than 5.7 million members in Québec and Ontario, including over
400,000 business members, close to 40,000 dedicated employees, and nearly
7,000 committed elected officers.
n 1,439 points of service in Québec and Ontario: 549 caisses and 890 service centres.
n 113 points of service in Manitoba and New Brunswick: 40 affiliated caisses and
73 service centres.
n 53 Business Centres in Québec and 3 in Ontario.
n 32 Desjardins Credit Union points of service in Ontario.
n Approximately 20 companies offering a wide range of financial services, with many
of them active in several Canadian provinces.
n A state-of-the-art virtual network on automated teller machines and the Internet.
CAISSE CENTRALE DESJARDINS ISDESJARDINS GROUP'S TREASURER
n Nearly $ 18 billion in assets.
n $ 118 billion in derivatives.
n Funding programs of $ 15 billion in Canada and other parts of the globe.
n Borrowings on the Canadian money market (no upper limit).
n Authorized credits nearly $ 10 billion for businesses and public sector institutions.
n Business offices in Québec and Ontario.
n One U.S. retail Banking subsidiary.
n One U.S. Branch for corporate loans.
n A network of banking correspondents on every continent.
n First-class credit ratings.
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THE LARGEST COOPERATIVE FINANCIAL GROUP IN CANADACAISSE CENTRALE DESJARDINS ISDESJARDINS GROUP'S TREASURER
Caisse centrale Desjardins (“Caisse centrale”) is a key player within the Desjardins extended family. As acooperative owned by the Desjardins caisses and auxiliary federations, Caisse centrale operates on bothCanadian and international markets, working together with the other Desjardins Group entities andcomplementing their activities.
Caisse centrale therefore generates attractive financial benefits for Desjardins Group as a whole.
Like Desjardins Group, Caisse centrale receives first class credit ratings from the main rating agencies.These ratings rank among the best in the entire financial industry, not only in Canada, but alsointernationally, in the cooperative financial sector.
TABLE OF CONTENTS
Organization Chart 2
Areas of Activity 3
Financial Highlights 4
Management’s Message 6
Review of Operations
Desjardins Group’s Treasurer 8
Customized Products and Services forBusinesses and Institutions 10
New Markets 12
An Expert Supporting You Around the World 14
The Cooperative Difference 16
Three-Year History 19
Financial Review 21
Management’s Discussion and Analysis 22
2006 Consolidated Financial Statements 54
Constitution, Regulation and Control 84
Corporate Governance 86
General Information 96
Financial Glossary 99
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ORGANIZATION CHART
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Optiinsurance
Desjardins Financial Security Investments
5,770,757 MEMBERS in Québec and Ontario
549 CAISSES in Québec and Ontario
Gestion Valeurs mobilièresDesjardins
Société immobilièrePlace Desjardins
218,838 MEMBERS in New Brunswick and Manitoba
40 CAISSES in New Brunswick and Manitoba
DesjardinsSecurities International
LP and Desjardins regional development funds
The Personal Insurance Company*
Certas Direct, Insurance Company*
The Personal General Insurance*
SFL Management Sigma Assistel
Desjardins Global Asset Management
Fiera Capital* Place Desjardins
Développement international Desjardins
Desjardins General Insurance*
Desjardins General Insurance Group
Desjardins Financial Security
Desjardins Asset Management
Desjardins Securities
Disnat
Desjardins Venture Capital
Fondation Desjardins
Société historique Alphonse-Desjardins
Desjardins Trust
Fonds de sécurité Desjardins
Capital Desjardins
FÉDÉRATION DES CAISSES DESJARDINS DU QUÉBEC
Desjardins Credit Union
Ontario federation
New Brunswick and Manitoba federations
49,817 DCU MEMBERSin Ontario
Desjardins Capital régional et coopératif(1)
Caisse centrale Desjardins
Desjardins Financial Services Firm
Caisse centrale DesjardinsU.S. Branch
Desjardins Bank
AN INTEGRATED COOPERATIVE FINANCIAL GROUPORGANIZATION CHART OF DESJARDINS GROUP
OTHER INFORMATION As at December 31
2006 2005
Manitoba and Total Manitoba and TotalGroup (1) New Brunswick (2) Group Group (1) New Brunswick (2) Group
Number of employees(3) 39,294 1,549 41,534 39,294 1,303 40,597Number of members 5,820,574 218,838 6,039,412 5,4160,303 219,885 5,636,188Number of elected officers 7,020 405 7,425 7,184 410 7,594Number of member caisses 549 40 589 568 40 608Number of service centres 922 73 995 921 73 994Number of automated teller machines 2,787 134 2,921 2,802 130 2,932
(1) Excluding the federations and caisses of Manitoba and New Brunswick, but including Desjardins Credit Union. (2) Federations and caisses of Manitoba and New Brunswick.(3) Includes the employees who work among subsidiaries that have activities outside the province of Québec.
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AREAS OF ACTIVITY
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AREAS OF ACTIVITY Caisse centrale’s areas of activity include:
ACTING AS DESJARDINS GROUP’S TREASURER:
n Financial settlement and clearing of items transiting through thecaisse network across Canada and internationally
n Supply of funds from Canadian and international capital markets inorder to meet Desjardins Group’s liquidity requirements
n Securitization operations as a source of funds for Desjardins Group
n Management of the required liquidity fund for caisses
n Derivatives and other treasury products
n Management of matching activities
n Treasury management for Desjardins Credit Union
ACTING AS A SERVICE PROVIDER TO BUSINESSESAND INSTITUTIONS:
FINANCING
Caisse centrale’s industry expertise is a major asset that complements theservice offering of the Desjardins Business Centres. In addition, its team ofspecialists provides financing that meets the needs of mid-size businessesand large corporations:
n Operating loans
n Term loans
n Letters of credit and guarantee
n Banking syndicates
In order to support businesses with U.S. operations, Caisse centrale alsoprovides financing in the United States through:
n Desjardins Bank, its Florida-based retail subsidiary, and
n Caisse centrale Desjardins U.S. Branch, its commercial lending branch
The services and manufacturing sectors in which many of Caisse centrale’sresources specialize include:
n Agrifood
n Forest products
n Communications
n Energy resources
BANKING SERVICES
Caisse centrale offers the financial and treasury services below to theprivate sector (mid-size businesses and large corporations) and to thepublic and parapublic sectors:
n Account collection and direct payment (POS terminals)
n Reconciliation/consignment
n Cheque issue and deposit
n Balance aggregation
n Direct deposits/withdrawals
n Electronic cash command services
n Derivatives
INTERNATIONAL SERVICES
The Desjardins International Service Centre, managed by Caisse centrale,offers the following services to import and export businesses:
n Foreign exchange contracts and direct access to FX traders
n Import/export letters of credit
n Factoring
n Inter-currency transfers
n U.S. lock boxes
n Foreign currency accounts
n Money orders and drafts
n Desjardins Global Treasury Management
In addition to financing, Desjardins Bank offers a broad spectrum ofproducts and services, including:
n Online financial services
n Business accounts
n U.S. merchant number for Canadian and American businesses
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FINANCIAL HIGHLIGHTS
2006 HIGHLIGHTSASSET MANAGEMENT: EVEN GREATER VALUE FOR INVESTORS
Caisse centrale continues to be active on Canadianand international markets as Desjardins Group’sTreasurer and service provider for businesses andinstitutions.
Fiscal 2006 saw the integration of the Group’streasury activities, in particular regarding liquiditymanagement, caisse network matching, deposit fundmanagement, financing of credit card activities andtreasury product offerings for Desjardins business andinstitutional clients.
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CONTRIBUTION TO NETWORK(in millions of $)
ASSETS(in billions of $)
n Integration of Desjardins Group’s treasury activities
n Participation of a number of caisses in thesecuritization program for a total of $1.3 billion
n 98% customer satisfaction rate regarding Caissecentrale’s service offering
n U.S. branch established: US$500 million approved
n Close to 900 SMEs met and informed aboutDesjardins international products
n Some 1,000 SMEs signed up for direct access toCaisse centrale’s FX traders
n Record contribution of $96.1 million to the caissenetwork
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FINANCIAL HIGHLIGHTS
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FINANCIAL POSITIONAs at December 31(in millions of dollars and as a percentage)
2006 2005 2004
Total assets $ 17,597 $ 15,757 $ 14,770Average assets 15,421 13,969 12,885Securities 3,805 3,349 2,843Total
Caisse network 2,718 3,129 2,706Other 8,206 7,157 7,481
Total loans 10,924 10,286 10,187Deposits and subordinated debenture 13,548 12,054 11,366Members’ equity 911 688 687Off-balance sheet financial instruments $ 127,707 $ 107,993 $ 105,404Total capital ratio 13.9% 13.9 % 15.5%
RESULTS OF OPERATIONSFor the years ended December 31(in millions of dollars)
2006 2005 2004
Gross income $ 189 $ 162 $ 153Provision for credit losses 17 15 15Net income 54 49 44Total contribution to network 96 85 80
CREDIT RATINGSShort term Medium and long term
Standard and Poor’s A-1 + AA -Moody’s P-1 Aa1 (1)
Dominion Bond Rating Service R-1H AA
Credit ratings are intended to provide investors with an independent assessment of the credit quality of an issue of securities. The AA and Aa rating category is the second highest rating assigned by DBRS, S&Pand Moody’s to long-term debt securities. Moreover, the “high” and “low” designations on ratings by DBRS, the plus or minus sign in the case of S&P, and the numerical modifiers 1, 2 and 3 used by Moody’sindicate relative quality within their respective rating categories. Each rating agency has several rating categories for long-term debt securities. Prospective purchasers of debt securities should consult the ratingagency in question concerning how the ratings stated above are to be interpreted as well as their repercussions.
The above ratings must not be construed as a recommendation to buy, sell or hold debt securities, and they may be subject to revision or withdrawal at any time by the rating agencies.
(1) On March 2, 2007, this rating was revised upward from Aa3 to Aa1.
6 MANAGEMENT’S MESSAGE
CULTIVATING SUCCESS
One of the year’s major challenges was to establish Caisse centrale’s
function as the “Group’s Treasurer” under the program to reinforce
Desjardins Group’s strategic management structure. Consequently,
2006 was marked by the transfer of the Group’s treasury activities and
their integration with those of Caisse centrale, particularly regarding
liquidity management, caisse network matching, deposit fund
management, management of credit card activity matching and treasury
product offerings for business clients and various Desjardins entities.
The alignment of the transactions of Desjardins caisses and business units
with Caisse centrale’s operations will ensure optimal planning for
decision-making while increasing the added value of treasury activities.
In addition, our treasury product offering for businesses was also reviewed
and enhanced in keeping with the changing needs of both our clients
and the network. We will therefore continue to stay abreast of new
trends and broaden our line of treasury products in order to meet these
growing and evolving needs.
Caisse centrale makes available to the Group sources of funding that
take into account its needs and opportunities on both domestic
and international markets.
Securitization, an alternate funding solution initiated in 2005, is and will
continue to be a key component of Desjardins’ financial strategy. Our
securitization program was a tremendous success in 2006. In conjunction
with a number of Desjardins caisses in Quebec and Ontario, Caisse
centrale participated for more than $1 billion in the four Canada
Mortgage Bond issues made under the Canada Mortgage and Housing
Corporation program. In 2007, we expect this solution will be expanded
to include more eligible products and offered to other financial services
cooperatives across Canada.
Over the past year, we continued to use all our traditional funding
programs. We launched two issues on European markets, one of which
amounted to a record high of 1 billion. We therefore intend to maintain
the close ties that we have already established with institutional investors
in all markets and to continue to forge new ones as well.
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DESJARDINS GROUP’S TREASURERIn 2006, Caisse centrale, Desjardins Group’s Treasurer, experienced significant growth in all its activities, andrecorded many exceptional results. This performance is attributable primarily to the core business developmentareas on which it has focused in recent years. We are therefore proud to present the results for 2006.
In the same vein, Caisse centrale’s remarkable contribution paid to the network exceeded $90 million for thefirst time in its history. It totalled $96.1 million, up 13% from the previous year.
JEAN-GUY LANGELIERPresident and Chief Operating Officer
of Caisse centrale Desjardins and Chief of the Treasury of Desjardins Group
ALBAN D’AMOURSChairman of the Board and Chief Executive Officer of Caisse centrale Desjardins and President and Chief Executive Officer of Desjardins Group
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The success of our service offering for businesses and the institutional
segment in 2006 proved that our development strategies were right on
track. These strategies are based essentially on striving for continuing
improvement in our roles as banking syndicate agent and coagent and on
our expertise in certain industries, such as the agrifood, communications,
forest product and energy resource sectors. With the strength of our team
of specialists in these respective sectors, we have found that most of the
new financial transactions approved are the direct result of our
development orientations.
Attuned to the needs of our clients and eager to meet them, we have
taken the necessary measures to provide these clients with adequate
support in their expansion outside Quebec, in both the rest of Canada
and the United States. Moreover, we have increased the geographic
diversification of our loan portfolio in recent years, since two thirds of the
new credits approved in 2006 were in new markets. With the opening of
a Caisse centrale branch in the United States, we have been able to make
significant progress.
In partnership with the Desjardins Business Centres, we have updated our
service offering for these centres regarding the mid-size business segment.
As a result, our two teams exclusively dedicated to this segment have
become the standard-bearers for Caisse centrale’s complete product and
service offering. A new credit approval process is now being used by these
teams to respond more promptly and efficiently to business applications.
There were also major achievements in the institutional segment, in
particular regarding megacities, which allowed Desjardins to continue to
be recognized as the financial institution of choice in this market in
Quebec. We also made significant breakthroughs in Ontario in partnership
with Ontario caisses and Desjardins Credit Union.
Headway was also made in the area of banking services, with close to
$1 million in new contracts.
International products and services also grew in volume, earning Caisse
centrale a leadership position in this market. Its success can also be
attributed to improved distribution channels as a result of the automation
of certain products.
Lastly, we are convinced that the success of Caisse centrale is inextricably
linked to the quality of its personnel, combined with the dedication of its
Board of Directors.
In addition, we continue to view with interest the results of the annual
customer satisfaction survey. It is noteworthy that 98% of respondents
reported that they were satisfied or very satisfied with the service received
from Caisse centrale in 2006. We believe these excellent results are a
good indicator of our effectiveness.
Our members and clients are our first priority, and we constantly strive to
find better ways of meeting their needs for financial products and
services.
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Alban D’AmoursChairman of the Board and Chief Executive Officer of Caisse centrale Desjardins and President and Chief Executive Officer of Desjardins Group
Jean-Guy LangelierPresident and Chief Operating Officer of Caisse centrale Desjardins and Chief of the Treasury of Desjardins Group
MANAGEMENT’S MESSAGE
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DESJARDINS GROUP’S TREASURERUnder the program to reinforce Desjardins Group’s strategicmanagement structure, Caisse centrale, the Group’s Treasurer,integrated treasury activities throughout 2006, in particularregarding liquidity management, caisse network matching, depositfund management, financing of credit card activities and treasuryproduct offerings for Desjardins business and institutional clients.Improved alignment of the transactions of caisses and business unitswith Caisse centrale’s operations has led to better planning fordecision-making while increasing the added value of treasuryactivities and ensuring overall strict and focused management offinancial activities.
INTEGRATION OF TREASURY OPERATIONS
Under Caisse centrale’s mandate, a number of initiatives wereput forward for integrating treasury operations. First was theproposal to use the same benchmark index (Scotia index) forportfolios totalling about $5 billion under its management. In2006, the aggregate return on these portfolios was 0.6%higher on a cumulative basis than the benchmark index.
At the same time, the deposit fund was gradually refocused onits core activities; for example, interfund trading is nowchannelled through the administration fund, which settles allits advances to the deposit fund in a single transaction. Finally,regarding the basic asset/liability matching of the deposit fund,namely caisse loans and deposits, the strategy chosenproduced a neutral position so that results are not affected byinterest rate fluctuations.
Caisse centrale also presented to the Desjardins Card ServicesDivision a financing method for its activities that will beintegrated with its treasury operations and implemented in thecoming year. It was therefore agreed that, given the scope andrecurring nature of the funding requirements of DesjardinsCard Services, cash advances would gradually reflect Caissecentrale’s cost of borrowing over a five-year term.
DESJARDINSSECURITIZATION PROGRAM
(in millions of $)
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Issues Cumulative outstandings
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In order to improve the management of Desjardins CardServices’ matching activities, financial transactions related toconsumer loans and including a repayment schedule will nowbe matched; various prepayment assumptions, carefullyvalidated by the Group’s Integrated Risk ManagementExecutive Division, have been incorporated.
In its role as Desjardins Group’s Treasurer, Caisse centrale isnow responsible for managing caisse interest rates with respectto balance sheet matching. In conjunction with the Group’sIntegrated Risk Management Executive Division, it has takenover the production of reports, sensitivity analyses and requiredsimulations from the Fédération. Caisse centrale also presidesover the matching committee, which establishes the parametersfor managing caisse balance sheets and devises the strategiesto be used depending on expected interest rate fluctuations.
FUNDING
Resorting to financial markets has grown, and Caisse centralehas made every effort to multiply initiatives in order to tapmarket opportunities. In 2006, Caisse centrale was active onthe Canadian market through the regular and ongoing issueof short-term deposits in the form of bearer term notes and Desjardins Acceptances. At year-end, these depositstotalled $4 billion.
Caisse centrale launched two medium-term deposit noteissues in Europe: a first ¤500 million issue maturing in fiveyears, and a second issue for a record 1 billion, maturing infour years.
As Desjardins Group’s Treasurer, Caisse centrale continues tomaintain close relations with institutional investors. It shouldbe mentioned that investment roadshows were held inJanuary 2006 in several European countries to promoteDesjardins’ offerings and expertise as a solid and profitableinvestment. Subsequent investment roadshows were held inFebruary 2007 in Austria, Italy, Portugal and Spain.
SECURITIZATION MARKS A SUCCESSFUL YEAR
Based on a very common and attractive banking industrypractice as an alternate solution to the traditional method offunding, Desjardins securitization program, set up by Caissecentrale at the end of 2005, has been highly successful. Incollaboration with many caisses in Quebec and Ontario, weparticipated in four Canada Mortgage Bond issues under theCanada Mortgage and Housing Corporation’s program for acumulative total of $1.4 billion.
A BROADER SPECTRUM OF TREASURY PRODUCTS
Caisse centrale intends to continue to offer treasury productsto caisse network members, businesses and institutions, andDesjardins Business Centres. For this purpose, severalinformation sessions were held to promote our offerings forthese clients.
SME members of Desjardins caisses, among others, can obtaindirect access to foreign exchange traders and deal directlywith our trading room specialists to develop the strategy bestsuited to their needs and execute the required trades. Foreignexchange volumes consequently were up over 30% in 2006,both for caisses and their SME members
In 2006, Caisse centrale launched two issues in Europe for a total of €1.5 billion.
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CUSTOMIZED PRODUCTS AND SERVICES FORBUSINESSES AND INSTITUTIONSFor many years, Caisse centrale has offered an extensive line ofproducts and services to medium-sized businesses and largecorporations, as well as the different levels of government and theirpublic and parapublic institutions. Deployment is structured aroundfinancing products tailored to meet each client’s specific needs. Inaddition, Caisse centrale proposes banking services, internationalservices and treasury products to complement the offerings of otherDesjardins Group components.
SATISFIED CUSTOMERS
Caisse centrale has always worked at staying close to its clients.Having a client-oriented approach helps it to gain a goodunderstanding of clients’ specific needs. As a result of the skilland expertise of Caisse centrale’s teams of account managers,the 2006 customer survey results, as previously mentioned,were up significantly, with 98% of clients reported as satisfiedor very satisfied with Caisse centrale’s service offering. Alsoconsistent with these results, of which we are very proud, isCaisse centrale’s exceptional client retention rate, which goesback many years.
KEY SUCCESS STRATEGIES
Caisse centrale proved once again in 2006 that it has adoptedthe appropriate business strategies. These strategies are based,among other things, on striving for continuing improvement inits roles as banking syndicate agent or coagent, and on itsexpertise in the four following industry sectors: agrifood,communications, forest product and energy resources.
In 2006, new business approved for large corporations reached$2.3 billion before syndication — a record high. While Caissecentrale is making good progress in this segment, its businessdevelopment continues to focus on the same three strategies:
• Accentuating its roles as agent or coagent, whichaccounted for more than 50% of the year’s new business inthe corporate sector;
• Focusing on specialized sectors, which accounted for 50%of approved new credit; and
COMMITMENTS AND OUTSTANDINGS(in billions of $)
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• Geographic diversification, which generated more than60% of total new business.
THE DESJARDINS INTEGRATED SERVICE OFFERING
Already a player in most banking syndicates involving Quebecbusinesses, and in an environment offering many merger andacquisition projects, Caisse centrale joined forces withDesjardins Securities, Desjardins Group’s securities broker, inorder to present a highly comprehensive Desjardins serviceoffering. While Caisse centrale worked on setting upnumerous business financings, Desjardins Securities did its partby playing an active role in bond or equity issues for thesesame clients.
In partnership with the Desjardins Business Centres, Caissecentrale updated its service offering for the Business Centresin order to provide them with increased support in the mid-size business segment. As a result, two teams are nowexclusively dedicated to this segment, working in severalQuebec cities, and have become the standard-bearers forCaisse centrale’s complete product and service offering.
In order to provide business clients with the best turnaroundtimes possible, all SME financing files in partnership with thenetwork are now approved jointly by the Fédération descaisses Desjardins du Québec and Caisse centrale. That is whya 2006 survey of the Desjardins Business Centres revealed asignificant increase in the Centres’ satisfaction with Caissecentrale, rising from 70% to 91% (very and fairly satisfied) inone year. At the end of 2006, approved credits in this marketsegment totalled more than $600 million, spread out amongseveral Quebec regions.
With regard to commercial lending activities, credit userecorded a year-over-year jump of more than 20%, exceedingthe $2 billion mark to stand at $2.2 billion at the end of 2006.It is noteworthy that this growth was not at the expense ofsound risk management: high-risk loans represented only1.3% of the total business loan portfolio at year-end.
INSTITUTIONAL SECTOR
The institutional sector has also been characterized bysustained growth. Caisse centrale maintained all its positionsas coagent in banking syndicates and made severalbreakthroughs, including winning the account of one ofQuebec’s new megacities. New business was up 16% over theprevious year, and 36% over 2004. Loans outstanding in theinstitutional sector expanded by 11% during 2006. With $6 billion of approved credit in this segment, Caisse centraleensures that Desjardins Group plays a leading role in thismarket in Quebec.
Business development in the institutional segment must gohand in hand with a competitive and comprehensive bankingservice offering. Caisse centrale therefore continued thebusiness development drive it launched several years ago,obtaining more than $900,000 in new contracts on an annualbasis. Transaction volume for banking services has alsoexpanded, with year-over-year growth of approximately 25%in the past three years.
Caisse centrale’s three winning business development strategies:
• Accentuating its roles as agent or coagent, which accounted for more than 50% of new business;
• Focusing on specialized sectors, which produced 50% of approved new credit; and
• Geographic diversification, which generated more than 60% of all new business.
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NEW MARKETSIn line with Desjardins Group’s strategic orientations, Caisse centraleis continuing its business development efforts in new markets inorder to diversify its loan portfolio geographically and to supportclients expanding both in Canada and internationally.
GROWTH IN MARKET SHARE
Targeting market share growth, Caisse centrale must step upits financing and banking service activities for businesses andinstitutions. It therefore continues to build on its momentumof recent years with almost $1 billion in new credits, up asignificant 82% from 2005 (and 160% from 2004).
Caisse centrale also continues to play its role as syndicateagent for Canadian credit unions. It approved some $320 million in new credits, strengthening its business tiesessentially with credit unions in Alberta and British Columbia.The financing set up since 2002 to support the cooperativemovement in Canada now totals more than $1 billion. Theseefforts are in line with Desjardins Group’s intention to establishcloser ties with Canadian credit unions, and are helping tofoster a stronger relationship.
GEOGRAPHIC DIVERSIFICATION
The geographic diversification undertaken by Caisse centralein recent years also includes financing Canadian enterpriseswith head offices outside Quebec. This diversification strategyis also based on its expertise in various industries because over90% of new financing was granted to businesses from theagrifood, communications, forest products and energyresource sectors.
NEW BUSINESS APPROVED OUTSIDE QUEBEC(in millions of CAD)
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2005
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Caisse centrale has also made significant headway in theinstitutional sector, primarily regarding health care andeducational institutions in Ontario. The approved credits forthis province amounted to nearly $200 million.
CAISSE CENTRALE’S EXPANSION SOUTH OF THE BORDER
Another objective of loan portfolio diversification is to allow Caisse centrale to support existing clients as they expand into new markets across Canada, of course, but also in the United States.
In Florida, Desjardins Bank has supported Desjardins SMEmembers since 1992 in starting up their U.S. operations. Over the years, many SMEs have obtained financing fromCaisse centrale’s retail subsidiary.
It should also be remembered that in 2004, Caisse centraleestablished a major commercial lending subsidiary, DesjardinsCommercial Lending U.S.A. Corp., to meet demand fromcompanies whose financing needs exceeded the scope ofDesjardins Bank.
The support platform for businesses in the United Statesexpanded in 2006 when Caisse centrale obtained branchstatus. Caisse centrale Desjardins U.S. Branch therefore allowsDesjardins to increase its response capacity not only for itsCanadian clients having U.S. operations, but also for U.S.businesses wishing to expand into Canada. In fiscal 2006,commitments in the order of US$500 million were approvedby Caisse centrale Desjardins U.S. Branch.
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Desjardins Bank
Desjardins Bank, a Florida-based subsidiary of Caisse centrale, is even more readily available tomembers who regularly visit the United States and to businesses with U.S. operations. A thirdservice centre has been opened in Lauderhill, and account holders can now make use of an onlinetransaction service. The Bank’s assets rose by 15% in 2006 to US$174 million, mainly as a result of its mortgage portfolio acquisition strategy and growth in its commercial lending portfolio.
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AN EXPERT SUPPORTING YOU AROUND THE WORLD Desjardins Group, through Caisse centrale, has always understoodthe importance of supporting and assisting its clients in all theirprojects, even outside Canada. As a result of globalized marketsand new technology, individuals are now travelling more andclients’ places of business have become more diversified. Caissecentrale has always been, and will continue to be, in the forefrontof meeting the international needs of Desjardins’ individual andbusiness members.
INTERNATIONAL PRODUCTS AND SERVICESCONSTANTLY EVOLVING
Caisse centrale is responsible for developing the internationalproducts and services needed by individual and businessmembers of Desjardins caisses, for operating the systemsrequired for such products and services and for providing areliable network of international correspondents.
In this business segment, our role is to support caisse networkand Desjardins Business Centre personnel by providing themwith the complete line of Desjardins products so that they canproperly serve members. Our team of international serviceexperts is well equipped to handle all their requests and toprovide them with information sessions. Incidentally, over2,500 caisse and Desjardins Business Centre employeesattended such meetings in 2006.
Caisse centrale has set up a seasoned team to provideDesjardins Business Centre account managers with support intheir business development efforts. In fiscal 2006, more than900 small and medium-sized enterprises were met andinformed about Desjardins international products and services.
TRANSFERS(in thousands of $)
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RESULTS THAT SPEAK FOR THEMSELVES
Caisse centrale’s work with the caisse network and DesjardinsBusiness Centres was favourably rated in the survey conductedwith these clients. In fact, 97% of the caisses and 98% ofDesjardins Business Centres described themselves as fairlysatisfied and very satisfied with our international serviceexperts. Given these tremendous results, Caisse centraleintends to continue to provide leading-edge expertise ininternational services.
SHARP GROWTH IN A NUMBER OF AREAS
International products and services as a whole are growingsignificantly, partly as a result of the distinctive service providingdirect access to the trading room for SME members ofDesjardins caisses. In fact, access to Caisse centrale’s foreignexchange traders is available on conditions that are among themost flexible in the market. In 2006, close to 1,000 SMEs hadsigned up for this service.
Continuous improvement in the distribution channels forCaisse centrale’s international services is a top priority; aftertransfers were made available through AccèsD Affaires, asimilar project was launched for letters of credit, andautomation of forward exchange contracts will follow in 2007.
Lastly, Caisse centrale has promoted closer ties between itsinternational service development teams and its financingaccount managers in order to ensure a comprehensive productand service offering for business members of the Desjardinscaisse network.
Caisse centrale’s factoring volume was up significantly by about 17%, its letters of credit andguarantee by 42%, its transfers by 14% and its “foreign exchange transactions” by 30%.
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THE COOPERATIVE DIFFERENCECaisse centrale is a cooperative institution that belongs to theDesjardins caisses and auxiliary federations, and the hallmarks of thecooperative difference are evident in its business practices andorientations. Caisse centrale distinguished itself once again this yearthrough actions that supported cooperative development.
CONTRIBUTION TO THE NETWORK
From the very start, one of Caisse centrale’s practices has been to remunerate the caisses with the full amount of its net income. Its contribution to the network, including otherpayments, totalled $96.1 million in 2006, representing both a new high, and a year-over-year jump of 13%.
To express their satisfaction with the high calibre of Caissecentrale’s performance and the returns it generated, thecaisses and auxiliary federations injected $221 million ofcapital in the institution. With this new investment, Caissecentrale will be able to pursue its development drive andcontinue to stand out in its markets.
CONTINUING OUTSTANDING SERVICE QUALITY
The quality of service at Caisse centrale and its subsidiaryDesjardins Bank has been very widely recognized. In fact, a2006 survey of the network and its clientele revealed anexcellent satisfaction rate.
APPROVED CREDITS FOR THE COOPERATIVE SECTOR
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A WORTHY REPRESENTATIVE OF DESJARDINS GROUP ON CAPITAL MARKETS
Caisse centrale constantly highlights both the merits of thecooperative movement and everything Desjardins Group has to offer to the financial community on Canadian andinternational capital markets. In 2006, Caisse centraleembarked on a European tour, visiting investors in some 15 countries.
Not only were the two European issues in 2006 a greatsuccess, each was jointly led by three European financialcooperative groups, thereby reinforcing Desjardins’ relationshipwith the international financial cooperative movement.
A CONTINUING COMMITMENT TO THEDEVELOPMENT OF COOPERATIVES
Caisse centrale contributes to the Canada-wide development ofcooperatives through its financing activities, as shown by itswork with Canadian credit unions and many agrifood and forestproduct cooperatives. The total approved credits extended to theCanadian cooperative sector were in the order of $700 million.
In addition to providing this substantial financial support, Caissecentrale continues to play an oversight role in the developmentof Desjardins Credit Union in Ontario, currently ahead of itsoriginal business plan.
A CONCERN FOR ACCESSIBILITY
In line with its cooperative values, Caisse centrale hasdistinguished itself by offering small businesses services thatare generally available only to larger ones. A good example isthe direct access to foreign exchange traders. As a result,some 1,000 SMEs that are caisse members can deal directlywith our foreign exchange traders on the most flexibleconditions in the market in order to develop a strategy tailoredto their needs and execute the required trades.
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Another aspect of the cooperative difference which characterizes Caisse centrale is itscommitment to the community. For many years, it has supported close to 400 social, cultural,scientific and educational organizations through donations, sponsorships and benefit activities.
MIRRORING DESJARDINS GROUP’S SOLIDARITY
In 2006, Caisse centrale continued to support the Youth Profitprogram launched by Desjardins, among others, by providinginternships and temporary employment to numerous students.In addition, it also granted some $170,000 to organizationspromoting youth development, including FondationDesjardins, the bursary fund for the École nationale de théâtreand the Fondation Avenir Jeunesse du Québec.
Caisse centrale also forged closer ties with ethnic communitiesby participating in the fundraising activities of organizationssuch as the Asia Pacific Foundation of Canada, the Centreculturel vietnamien Hông Duc and the Festival InternationalNuits d’Afrique.
Organizations in the health care and research sector were alsofavoured, including the Fondation Docteur Maurice-Bertrandfor the benefit of the Association d’Entraide Ville-Marie, theAssociation québécoise de la fibrose kystique and theFondation du Centre hospitalier Pierre-Boucher.
In addition, Caisse centrale sponsored a number of eventsorganized by economic organizations such as chambers ofcommerce and business assocations.
Caisse centrale’s annual benefit golf tournament is always agreat success. The 11th edition, in spring 2006, raised some$80,000 through the participation of a number of Desjardinsclients and business partners, for a total of nearly $600,000donated over the years for about a dozen organizationsdedicated primarily to helping children in need.
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THREE-YEAR HISTORY As at December 31, 2006, Caisse centrale’s consolidated assetsstood at $17.6 billion, up from $14.8 billion in 2004, particularly asa result of the increase in securities, private sector loans andcustomers’ liability under acceptances.
Loans to Desjardins Group members and affiliates totalled$6.6 billion as at December 31, 2006, compared to $6.4 billion as at December 31, 2004. In the past three years,Caisse centrale, as the Group’s Treasurer, has carried out itsinitiatives aimed at reducing the funding requirements of thecaisse network. The required liquidity was reduced by $1.5 billion in 2005, and under the Canada Mortgage andHousing Corporation’s mortgage-backed securities program,close to $1.4 billion in mortgage loans was securitized.
Caisse centrale acts as the Group’s financial agent for theDesjardins caisse network and consequently, it has built updomestic and international funding sources by varying themarkets, instruments, maturity dates and currencies of itsdeposits. The approved amounts under the Canadian andEuropean medium-term deposit note programs were increasedrespectively from $2 billion to $5 billion in 2005, and fromUS$5 billion to US$7 billion in 2006. Furthermore, fundingobtained from the Canadian market amounted to $7.3 billionas at December 31, 2006, representing 53% of total deposits,versus $7 billion or 62% in 2004.
Financing activities in the private sector were primarilyconcentrated in the manufacturing sector and the servicecompanies sector. Outstanding private sector loans grew bysome $800 million in three years to total $2.6 billion as atDecember 31, 2006. This increase was attributable, inparticular, to our breakthroughs as banking syndicate agent orcoagent as well as the headway made in new markets.Whether in Canada-wide financings or financings in theUnited States, such business development has led to thegeographic diversification of our private sector loan portfolio.
In 2004, in order to better support businesses operating onboth sides of the border, Caisse centrale opened a Florida-based commercial lending subsidiary, Desjardins CommercialLending U.S.A. Corp. In 2006, it broadened its service offeringfor these clients by obtaining the status of a U.S. branch.Caisse centrale U.S. Branch can now carry out major financingtransactions.
In partnership with the caisse network and Desjardins BusinessCentres, Caisse centrale improved its service offering for thepublic and parapublic sectors; the amount of loans grantedremained relatively stable at around $1.5 billion between 2004 and 2006.
In addition, in 2004, Caisse centrale set up a team ofseasoned advisors regarding derivatives and other treasuryproducts for all Desjardins Group clients. This strategy provedto be profitable as its interest spread rose significantly.
Caisse centrale has steadily expanded its online internationalbanking service offering for business members of Desjardinscaisses. Moreover, the volume of foreign exchangetransactions performed by the Desjardins caisse network andtheir business members through Caisse centrale’s foreignexchange traders expanded by nearly 80% between 2004 and 2006.
Caisse centrale also continued to implement its Integrated RiskManagement program initiated in 2001. Work was carried outunder the Fédération’s comprehensive Integrated RiskManagement and Basel Accord program (IRMBA) for allDesjardins Group entities. Such integrated management willpromote risk identification and measurement as well asoptimal capital allocation and will be integrated intoDesjardins Group’s strategic planning and performancereviews. Important work on credit risk, liquidity risk, marketrisk and operational risk will continue in 2007 and in thecoming years.
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21SUMMARY FINANCIAL REVIEW
22 MANAGEMENT’S DISCUSSION AND ANALYSIS
22 Caution regarding forward-looking statements22 Risk factors that may affect future results23 Financial disclosure controls and procedures24 Analysis of consolidated financial statements
and critical accounting policies26 Caisse centrale’s strategy27 Economic review28 Analysis of consolidated results
Net income and contribution to networkNet interest incomeOther incomeSegment analysisProvision for credit lossesNon-interest expenseOther payments to the Desjardins networkIncome taxes and other taxesRemuneration of capital stock
34 Analysis of quarterly trends34 Analysis of fourth quarter results35 Comments on assets37 Analysis of cash flows37 Off-balance sheet arrangements38 Risk management review40 Credit risk40 Credit risk management42 Managing liquidity and sources of funding 45 Market risk management48 Operational risk management49 Capital management
54 2006 CONSOLIDATED FINANCIAL STATEMENTS
54 Audit Commission’s Annual Report55 Management’s Report56 Auditors’ Report57 Consolidated financial statements61 Notes to the consolidated financial statements
84 CONSTITUTION, REGULATION AND CONTROL
86 CORPORATE GOVERNANCE
96 GENERAL INFORMATION
99 FINANCIAL GLOSSARY
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CAUTION REGARDINGFORWARD-LOOKINGSTATEMENTS
This report may contain forward-lookingstatements regarding the activities, objectivesand strategies of Caisse centrale. By their very nature, these forward-looking statements are based on assumptions and necessarilyinvolve both general and specific risks anduncertainties. Risks exist that the express orimplied projections in these statements will not materialize or that they will be inaccurate.A number of factors could cause future results,conditions, measurements or events to differmaterially from the objectives, expectations,estimates or intentions expressed in suchstatements. These variances may be the resultof factors, many of which are beyond thecontrol of Caisse centrale, such as changesaffecting legislation and regulations,competition, technological advancements,international capital market activities, interestrates and Canadian, North American and globaleconomic conditions. These factors and othervariables should be carefully analyzed, andreaders should not place undue reliance on theforward-looking statements of Caisse centrale.
RISK FACTORS THATMAY AFFECT FUTURERESULTS
As indicated in the caution regarding forward-looking statements, the risks and uncertaintiesinevitably associated with any such statementsare both general and specific, and may causethe actual results of Caisse centrale to differfrom those in forward-looking statements.Some of these factors are presented below.
INDUSTRY RISK FACTORS
General economic and businessconditions in regions whereCaisse centrale conducts business
General economic and business conditions inthe regions in which Caisse centrale operatesmay significantly affect its revenues. Theseconditions include short and long-term interestrates, inflation, capital market fluctuations,foreign exchange rates, the strength of theeconomy, terrorist threats and the volume of business conducted by Caisse centrale in a given region.
Monetary policy
The monetary policies of the Bank of Canadaand the Federal Reserve Board in the UnitedStates, as well as other interventions in capitalmarkets, have an impact on the revenues ofCaisse centrale. The general level of interest ratesmay affect the profitability of Caisse centrale.A fluctuation in the level of interest ratesaffects the spread between interest paid ondeposits and interest earned on loans, leadingto a variation in Caisse centrale’s net interestincome. Caisse centrale has no control overchanges in monetary policies or capital marketconditions and it therefore cannot forecast oranticipate them systematically.
Competition
The degree of competition in markets in which Caisse centrale operates affects itsperformance. Customer retention depends on many factors such as product and servicepricing, customer service delivery and changesto the products and services offered.
Changes in standards, laws and regulations
Changes made to standards, laws andregulations, including changes affecting theirinterpretation or implementation, could have an impact on Caisse centrale by restricting itsproduct or service offering or by enhancing the ability of competitors to compete with its products or services.
Completeness and accuracy of informationconcerning customers and counterparties
Caisse centrale relies on the completeness and accuracy of the information concerning its customers and counterparties. Whendeciding to authorize credit or othertransactions with customers or counterparties,Caisse centrale may use information providedby them, including financial statements andother financial information. It may also rely on representations made by customers andcounterparties regarding the completeness andaccuracy of such information, and on auditors’reports regarding the financial statements. The financial condition and revenues of Caisse centrale could be adversely affected ifit relied on financial statements that do notcomply with generally accepted accountingprinciples, are misleading or do not presentfairly, in all material respects, the financialcondition and the results of the operations of customers and counterparties.
22 MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT’S DISCUSSIONAND ANALYSISThis Management’s Discussion and Analysis (“MD&A”) compares the financial condition and results of operations of Caisse centrale Desjardins (“Caissecentrale”) as at and for the years ended December 31, 2006 and 2005, prepared in accordance with Canadian generally accepted accounting principles.This MD&A is dated February 27, 2007, and unless otherwise indicated, all stated figures are in Canadian dollars. It also discusses forecasts and riskmanagement. To assist the reader, we have added a glossary of financial terms at the end of the Annual Report on page 99. Additional information onCaisse centrale, notably its Annual Information Form, is also available on the SEDAR website at www.sedar.com and on Desjardins Group’s website atwww.Desjardins.com.
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23MANAGEMENT’S DISCUSSION AND ANALYSIS
RISK FACTORS SPECIFIC TOCAISSE CENTRALE
New products and services to retain orincrease market share
The ability of Caisse centrale to retain orincrease its market share depends partly on itsskill in adapting its products and services tochanging standards of the financial servicesindustry. Financial services companies aresubject to increasing pressure regarding thepricing of their products and services. Thisfactor may reduce net interest income orrevenues from commission-based products and services. Moreover, the adoption of newtechnology, including Internet services, canresult in major expenses for Caisse centrale, as it is required to modify or adapt its productsand services.
Ability to recruit and retain key officers
Caisse centrale’s future performance dependspartly on its ability to recruit and retain keyofficers. In addition, intense rivalry to attractthe best people pervades the financial servicesindustry. Caisse centrale cannot however besure that it will be able to continue to recruitand retain key officers, even though this is oneof the objectives of its resources managementpolicies and practices.
Business infrastructure
Third parties provide some of the essentialcomponents of Caisse centrale’s businessinfrastructure, such as Internet connections and network access. Interruptions in networkaccess services or other communicationservices, as well as in the data provided by suchthird parties could adversely affect the ability of Caisse centrale to offer products and services to customers and to otherwise conduct its business.
Foreign exchange rate
Exchange rate fluctuations in the Canadiandollar, the U.S. dollar and other foreigncurrencies may affect Caisse centrale’s financialcondition and its future earnings. Fluctuationsin the Canadian dollar may also adverselyimpact the earnings of Caisse centrale’sbusiness clients in Canada.
OTHER FACTORS
Other risk factors such as strategic, credit,market, liquidity, interest rate and operationalrisks, to name a few, are presented in the “RiskManagement” section starting on page 38 ofthis MD&A.
Caisse centrale cautions the reader that factorsother than the foregoing could affect futureresults. When investors and other stakeholdersrely on forward-looking statements to makedecisions with respect to Caisse centrale, theyshould carefully consider these factors as well asother uncertainties, potential events, and industryfactors or factors specific to Caisse centrale,which could adversely impact its future results.Caisse centrale will not update any forward-looking statements, whether written or oral,that may be made from time to time by it or on its behalf.
FINANCIALDISCLOSURECONTROLS ANDPROCEDURES
Caisse centrale must comply with certainrequirements of the Canadian SecuritiesAdministrators regulations regardingcontinuous disclosure obligations andcertification of financial reporting.
In order to meet the prescribed requirementsand based on industry best practices, the Chief Executive Officer and the Chief FinancialOfficer of Caisse centrale designed, or causedto be designed, financial disclosure controls and procedures, which are supported inparticular by the process for periodiccertification of financial disclosures made inannual and interim filings. All informationcollected as part of the financial governanceprocess is reviewed on a quarterly or annualbasis by the members of the DisclosureCommittee and of the Audit Commission ofCaisse centrale. The Commission plays a leadrole in the oversight and assessment of theappropriateness of financial disclosure controlsand procedures.
As at December 31, 2006, in compliance withMultilateral Instrument 52-109, “NationalInstrument 52-109 - Certification of Disclosurein Issuers’ Annual and Interim Filings”, and in accordance with the control frameworkrecognized by the Committee of SponsoringOrganizations (“COSO”) of the TreadwayCommission, the management of Caisse centraleevaluated the effectiveness of the financialdisclosure controls and procedures of Caissecentrale, as well as the effectiveness of thedesign of internal control over financialreporting.
These evaluations of the effectiveness offinancial disclosure controls and procedures as well as of the design of internal control overfinancial reporting reflect a material changemade to the internal control system.
Caisse centrale, actually, implemented a newtechnology solution in November 2006 tosupport banking and loan managementactivities, treasury operations support services,payment and accounting functions, andmanagement information.
Based on these evaluations, the Chief ExecutiveOfficer and the Chief Financial Officer of Caisse centrale have certified that the disclosurecontrols and procedures are effective to provideassurance that information required to bedisclosed in reports filed or submitted underCanadian securities laws is recorded, processed,summarized and reported within the timeperiods specified in those rules and forms, thus providing investors with complete andreliable information.
The Chief Executive Officer and the ChiefFinancial Officer have further certified that they designed, or caused to be designed undertheir supervision, internal control over financialreporting, which provides reasonable assuranceregarding the reliability of financial reportingand the preparation of financial statements forexternal purposes in accordance with generallyaccepted accounting principles.
On February 9, 2007, the CSA issued Notice 52-317 to communicate the new proposedschedule for proposed National Instrument 52-109, “Certification of Disclosure in Issuers’Annual and Interim Filings”. This noticeproposes that the requirement to certify theeffectiveness of internal control over financialreporting would apply in respect of financialyears ending on June 30, 2008 instead ofDecember 31, 2007. Depending on theeffective date to be published by the CSA in the revisions to the National Instrument,Caisse centrale will proceed to the finalimplementation phase of National Instrument52-109, namely the issuance of a report by management on the evaluation of theeffectiveness of internal control over financial reporting.
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24 MANAGEMENT’S DISCUSSION AND ANALYSIS CRITICAL ACCOUNTING POLICIES
ANALYSIS OFCONSOLIDATEDFINANCIALSTATEMENTS AND CRITICALACCOUNTINGPOLICIES
This section contains the analysis of thefinancial results of Caisse centrale, whichfocuses on the consolidated statements ofincome and the consolidated balance sheets inthe consolidated financial statements startingon page 54 of the Annual Report. Note 2 tothe consolidated financial statements presents asummary of the significant accounting policiesused in preparing the consolidated financialstatements of Caisse centrale. Some of theaccounting policies are considered criticalbecause they are key to understanding thefinancial condition and results of operations of Caisse centrale; they require Management to make difficult, subjective and complexestimates and assumptions since they concernessentially uncertain issues. Any change inthese estimates and assumptions could have a material impact on the consolidated financialstatements of Caisse centrale. Criticalaccounting policies concern the allowance forcredit losses, financial instruments measured atfair value, the valuation of investment accountsecurities, securitization and income taxes.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is an estimate of probable credit losses related to financialinstruments, whether or not presented in theconsolidated balance sheets of Caisse centrale,including loans, off-balance sheetcommitments, acceptances and derivativeinstruments. This allowance includes a generalprovision for credit losses and specificprovisions. A number of factors affect theestimates for the allowance for credit losses,including risk assessment, default probability,loss in the event of default, valuation ofsecurity, economic conditions and borrowers’specific situations. Any change in the estimatescan lead to modifications of the allowance forcredit losses. Note 4 to the consolidatedfinancial statements provides more details onthe allowance for credit losses.
FINANCIAL INSTRUMENTSMEASURED AT FAIR VALUE
Caisse centrale measures securities held fortrading purposes and derivatives at their fairvalue. Fair value represents the estimatedamounts at which these instruments couldactually be exchanged in a current transactionbetween willing parties. The fair values of anumber of financial instruments are based onmarket prices. If market prices are unavailable,fair values are estimated by using variousvaluation techniques or the prices of similarsecurities. Valuation techniques used includethe discounted cash flow method and optionpricing models. The methods to determine fairvalue and the assumptions used in thevaluation models can affect fair value and theresulting gains and losses. Other information on the methods used to determine fair valuesby Caisse centrale is provided in notes 2 and 13 to the consolidated financial statements.
VALUATION OF INVESTMENTACCOUNT SECURITIES
Under Canadian generally accepted accountingprinciples, investment account equity securitiesare stated at cost, while debt securities arecarried at amortized cost. If there is a loss invalue of an investment account security that is other than a temporary decline, its carryingamount must be written down to its netrealizable value. Determining whether there has been a loss in value that is other than atemporary decline and establishing the netrealizable value require subjective judgment and estimates. Management reviews the valueof investment account securities on an ongoingbasis in order to determine if there has been a loss in value that is other than a temporarydecline. This review includes an analysis of the specific facts of each investment and anassessment of expected future returns.
As part of this exercise, Management assesses a series of factors that could indicate a loss invalue that is other than a temporary decline.Such factors include the type of investment,how long fair value was less than the carryingamount and the significance of this difference,the issuer’s financial condition and short-termprospects, as well as Caisse centrale’s intentionand ability to hold the investment for asufficiently long period so that its value wouldrebound. When Management has determinedthat there has been a loss in value of a securitythat is other than a temporary decline, it mustform a judgment as to the estimated netrealizable value.
Any change in the judgments made to identifysecurities for which there has been a loss invalue that is other than a temporary declineand to estimate their realizable value couldimpact on the amount of losses recorded in the consolidated financial statements.
Caisse centrale presents the estimated fair valueof investment account securities in note 3 tothe consolidated financial statements. InManagement’s opinion, gross unrealized losseson investment account securities are not a lossin value that is other than a temporary decline.Further information on accounting forinvestment account securities is presented innote 2 to the consolidated financial statements.
SECURITIZATION
Caisse centrale participates in the NationalHousing Act (“NHA”) Mortgage-BackedSecurities Program. Under this program,Caisse centrale converts mortgage loansacquired from Desjardins Group into NHAmortgage-backed securities (“NHA-MBSs”).These securities are then sold to investorsthrough Canada Housing Trust.
These transactions are recorded as salesbecause Caisse centrale surrenders controlover the assets sold and receivesconsideration other than beneficial interests in these assets. As a result, the mortgageloans transferred are removed from theconsolidated balance sheets.
Determining the initial gain depends on themeasurement of certain retained interests.Since market prices are not all available, this measurement is based on estimates and assumptions using the present value of estimated future cash flows. The keyassumptions used to estimate this value arethe prepayment rate and the discount rate.Since all the mortgage loans are guaranteed,our assumptions do not include any provisionfor credit losses. Any change in theseestimates and assumptions could affect the amount of gains recorded. An analysis of the sensitivity of the fair value of retainedinterests to immediate 10% and 20% adversechanges in key assumptions is presented in note 5 to the consolidated financialstatements. Furthermore, since the value of retained interests has to be remeasuredperiodically, the methods of establishing fairvalue and the assumptions used could havean impact on the amounts recorded.
Further information on these transactions can be found in note 5 to the consolidatedfinancial statements as well as in the sectionof this MD&A on off-balance sheetarrangements.
INCOME TAXES
The income tax provision is established on the basis of the expected tax treatment oftransactions recorded in the consolidatedstatements of income or the consolidatedstatements of members’ equity. In order todetermine the current and future portions of the income tax provision, analyses andassumptions are established concerning the tax laws and the dates on which future tax
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25CRITICAL ACCOUNTING POLICIES AND ACCOUNTING CHANGES MANAGEMENT’S DISCUSSION AND ANALYSIS
assets and liabilities will reverse. If theinterpretation concerning tax laws differs fromthe one established by tax authorities or if thereversal dates of future tax assets and liabilitiesdiffer from the ones estimated, the income taxprovision could increase or decrease oversubsequent periods.
ACCOUNTING CHANGES
2006
Implicit Variable Interests
In October 2005, the Emerging IssuesCommittee issued Abstract No. 157, “ImplicitVariable Interests Under AcG-15” (“EIC-157”).This abstract specifies that implicit variableinterests are implied financial interests in anentity, which vary in accordance with changesin the fair value of the entity’s net assets,exclusive of variable interests. An implicitvariable interest is similar to an explicit variableinterest except that it involves absorbing orreceiving variability indirectly from the entity.
At the close of the year ended December 31,2006, the implementation of EIC-157 did nothave any impact on the financial reporting ofCaisse centrale.
2005
Variable Interest Entities (“VIE”)
On January 1, 2005, Caisse centrale adoptedAccounting Guideline 15, “Consolidation ofVariable Interest Entities” (“AcG-15”). AcG-15 is harmonized with the new FASB InterpretationFIN46R, “Consolidation of Variable InterestEntities,” and provides guidance on theapplication of the principles provided in Section1590, “Subsidiaries.” A variable interest entity isan entity whose equity is insufficient to permit itto finance its activities without additionalsubordinated financial support provided by a thirdparty, or an entity whose equity holders do nothave, as a group, the ability to make decisions,the obligation to absorb expected losses or theright to receive residual returns, if any. AcG-15provides for the consolidation of a VIE by itsprimary beneficiary, namely the enterprise thatabsorbs a majority of the expected losses and/orhas the possibility of receiving the majority ofresidual returns.
In adopting the guideline on January 1, 2005,Caisse centrale determined that it was not theprimary beneficiary of any VIE, nor did it have asignificant interest in any VIE. The implementationof AcG-15 did not have any impact on thefinancial reporting of Caisse centrale.
Financial Instruments
In January 2005, the Canadian Institute ofChartered Accountants (“CICA’) issued newstandards entitled “Financial Instruments –Recognition and Measurement” (Section 3855),“Hedges” (Section 3865) and “ComprehensiveIncome” (Section 1530), which are applicable toCaisse centrale as of January 1, 2007. The mainguidance on accounting for and measuringfinancial instruments and on accounting forhedging transactions is set out below.
a) Financial Instruments – Recognition andMeasurement
Financial assets will be required to be classified in one of the following four categories: held fortrading, available for sale, held to maturity, andloans and receivables. Financial liabilities will beclassified as held for trading or other. Financialassets and financial liabilities held for trading aswell as financial assets available for sale will berecorded on the consolidated balance sheet at fairvalue. Changes in the fair value of financial assetsand liabilities held for trading will be recorded inconsolidated income for the period, whilechanges in the fair value of available-for-salefinancial assets and liabilities will be recorded inconsolidated other comprehensive income untilthey are derecognized or become impaired andthe decline in their fair value is other thantemporary. Financial assets held to maturity, loansand receivables, and financial liabilities not heldfor trading will be recognized at their amortizedcost using the effective interest method.
Section 3855 allows any financial asset or liabilityhaving a fair value to be designated, on initialrecognition or on adoption of this standard, asbeing held for trading. These financial instrumentsdesignated as held for trading in accordance with the fair value option are subject to therequirements set by the Autorité des marchésfinanciers.
The initial recognition of certain financialguarantees at fair value on the balance sheet, and the use of the effective interest method for amortizing all transaction costs as well aspremiums and discounts for financial instrumentscarried at amortized cost are additionalconsequences of adopting Section 3855.
b) Derivative Financial Instruments and Hedges
Derivative financial instruments will be required tobe recorded on the consolidated balance sheet atfair value, including those embedded in financialinstruments or other contracts that are not closelyrelated to the financial instrument or the hostcontract. Derivative instruments that will not bedesignated as being part of a hedging relationshipwill be classified as held for trading. Derivativesforming part of a hedging relationship will be
designated as part of a fair value hedge or a cash flow hedge. In a fair value hedge, gains and losses resulting from the revaluation of thefair value of the derivative instrument and thehedged item attributable to the designated riskwill be recognized in consolidated incomeregardless of the classification of the hedged item.In a cash flow hedge, gains or losses resultingfrom changes in the fair value of the effectiveportion of the derivative instrument will berecorded in consolidated other comprehensiveincome until the hedged item is recognized inincome. The ineffective portion will be recognizedimmediately in consolidated income.
c) Comprehensive Income
The consolidated financial statements will includea “Statement of Comprehensive Income” andaccumulated other comprehensive income will bepresented as a new equity item on the consolidatedbalance sheets. Other comprehensive income willinclude, in particular, unrealized gains and losseson available-for-sale financial assets and thechange in the effective portion of a cash flowhedge transaction.
d) Impact of the Adoption of the NewFinancial Instrument Requirements
The adjustments resulting from revaluation ofavailable-for-sale financial assets and hedginginstruments designated, as part of a cash flowhedging relationship will be accounted for inthe opening balance of accumulated othercomprehensive income. Other transitionaladjustments arising from the adoption ofSections 1530, 3855 and 3865 will be recorded in the opening balance of retainedearnings as at January 1, 2007. The applicationof these accounting standards should not havea significant impact on the consolidatedbalance sheets of Caisse centrale.
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26 MANAGEMENT’S DISCUSSION AND ANALYSIS CAISSE CENTRALE’S STRATEGY
CAISSE CENTRALE’SSTRATEGY
Desjardins Group’s Treasurer
Caisse centrale Desjardins, the Group’sTreasurer, provides disciplined and sophisticatedoverall management of financial activities.Under the program to reinforce DesjardinsGroup’s strategic management structure, theGroup’s treasury activities were integrated in2006, in particular liquidity management, caissenetwork matching, deposit fund management,financing of credit card activities and treasuryproduct offerings to Desjardins business andinstitutional clients.
Under the mandate to integrate treasuryoperations, Caisse centrale refocused theFederation’s fund activities on the loans anddeposits of affiliated caisses. Caisse centralealso proposed a method of financing itsactivities to Desjardins Card Services alignedwith treasury operations.
In addition, financial transactions related to consumer loans and including a repayment schedule will now be matched;various prepayment assumptions, which were rigorously validated by Integrated RiskManagement, have been incorporated.
During 2006, Caisse centrale was active on the Canadian market through the regular andon-going issue of short-term deposits in theform of bearer term notes and DesjardinsAcceptances. These deposits totalled a record$4 billion at year-end. Caisse centrale madetwo medium-term deposit note issues inEurope: a first ¤ 500 million issue maturing in five years and a second issue for a record ¤ 1 billion, maturing in four years.
Caisse centrale’s securitization program, set upin the fall of 2005 as an alternative source ofregular funding, has been highly successful.Owing to the involvement of some 200 caissesin Quebec and Ontario, Caisse centraleparticipated in four issues under the CMHC’sCanada Mortgage Bonds Program for a total of $1.3 billion.
Caisse centrale intends to continue makingprogress in offering treasury products to caissenetwork members and Desjardins BusinessCentre members, as well as to businesses andinstitutions. A number of information sessionshave been held for these clients. Foreignexchange volumes increased over 30% throughthe caisses and their SME members, who haveaccess to foreign exchange traders.
Corporate Service Offering
For a number of years, Caisse centrale has been offering a range of products and servicesto medium-sized businesses and largecorporations, as well as to governments andtheir public and parapublic institutions. It offers banking services, international servicesand additional treasury products to otherDesjardins Group components.
Fiscal 2006 was a decisive year in manyrespects for the corporate market. Caissecentrale undoubtedly owes its success to thequality of its personnel. Its employees, whodemonstrate their unfailing commitment toCaisse centrale, as well as to its members andclients, are dedicated to meeting their needs.Caisse centrale therefore evaluates the resultsof its annual customer satisfaction survey withinterest, as the survey is a valid indicator of itseffectiveness. For fiscal 2006, 98% of itscustomers reported that they were satisfied or very satisfied with the service received.
Caisse centrale represents Desjardins Group in several banking syndicates for largecorporations and it aims to enhance its positionby acting as agent or coagent. Its businessdevelopment is based on its industrial expertise.
In order to extend its reach, Caisse centralecontinues to diversify its loan portfoliogeographically. Consequently, new authorizedbusiness in new markets has been growingsteadily.
It also continues to accompany businessesexpanding into the United States. Its serviceoffering was broadened in 2006 through the opening of Caisse centrale Desjardins U.S. Branch.
In the mid-size corporate market, Caisse centralehas developed a new service offering forDesjardins Business Centres. Two teamsdedicated to this market sector accompanybusinesses in their growth. In addition, all SME financing files in partnership with thenetwork are now authorized jointly by theFédération des caisses Desjardins du Québecand Caisse centrale. Its new business processhas been validated by a 91% satisfaction rate, up 21% in one year. Caisse centrale iscontinuing with its banking service offensive,and has obtained close to $1 million in new contracts.
Desjardins Bank opened its Lauderhill branchand has been posting impressive results. As aresult of its mortgage loan acquisition strategy,its assets grew 15% to US$174 million.
International Operations
Caisse centrale’s International Service Centrelooks after management of international tradeand payments. The team is gradually expandingits service offering in order to meet the needsof Desjardins clients around the world and tosupport Desjardins Group’s corporate sector.
Several types of products and services continueto grow between 15% and 30% in 2006.These results are certainly attributable to thepromotion and visibility efforts of its businessdevelopment team.
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27ECONOMIC REVIEW MANAGEMENT’S DISCUSSION AND ANALYSIS
ECONOMIC REVIEW
This section briefly summarizes theeconomic conditions in 2006 and includesour forecasts for 2007.
In 2006, the Canadian economy continued toexpand at the same rate as in the previous year.A number of analysts believe, in fact, that theeconomy has been operating at close tocapacity for the past few years, namely at ahigh enough rate to lower unemployment,without however triggering inflation.
Early in the year, North American authoritieshad appeared concerned by the flare-up inconsumer prices as a result of skyrocketing oil prices. In December, however, the threatseemed to subside, and monetary authoritiessuggested that the period of monetarytightening was drawing to a close.
In 2006, household spending and businessinvestment in capital equipment andinfrastructure once again strongly powered theeconomy, whereas commodity trade declinedsharply because of the solid appreciation of the Canadian dollar.
Household spending relied on increasedearnings, expansive job creation and relativelylow interest rates, despite the Bank of Canada’srestrictive monetary policy, which did not resultin higher long-term interest rates. As in theUnited States, households also took advantageof the higher value of their residentialproperties to increase their purchases.
Business expenses were largely concentrated inenergy and raw materials, whose strong salesabroad helped to firm up the value of theCanadian dollar.
However, a stronger loonie further reduced thecompetitiveness of manufacturing firms alreadyfacing fierce competition on the domesticmarket from Asian products. Other industries,such as forestry and pork production inQuebec, or the automobile industry in Ontario,must also make major structural changes to cut their costs and thus be able to counter the effect of the stronger Canadian dollar.
Recent statistics over the past few monthsconfirm that the solid performance of resource-based industries no longer gives reason to hopefor a target annual growth rate of 3%. Theeconomy has entered a slowdown phase in
lock-step with the U.S. economy, which couldlast until mid-2007 because it is highly unlikelythat households can offset the weakness offoreign trade and the cyclical downturn inhousing investments. More household debtwould be to the detriment of their personalbalance sheets.
Household credit for housing and consumptionpurposes has grown at an annual rate of over10% in the past three years, boosting theindebtedness ratio and depressing the savingsrate. To date, however, the steady increase inthe value of household assets, in the form ofsecurities or residential assets has meant thatpersonal balance sheets have not deteriorated.Nonetheless, in the early stage of a businessslowdown, asset valuation could bejeopardized, and households will be morecautious in their spending and investments.
The economy is likely to be weaker in 2007after a prolonged period of expansion. Theannual growth rate will level off, and even fallto 1% in Quebec in the next few quarters, butit should pick up again at year-end as a resultof a more accommodating monetary policy, alighter tax burden, a stable Canadian dollar andcontrolled inflation.
Main Economic Indicators
Forecast Preliminary2007 2006 2005 2004 2003
United StatesGross domestic product 2.2 % 3.3% 3.2 % 3.9 % 2.5 %Inflation 1.9 3.2 3.4 2.7 2.3Unemployment 5.0 4.6 5.1 5.5 6.0
CanadaGross domestic product 2.1 2.7 2.9 3.3 1.8Inflation 1.7 2.0 2.2 1.9 2.8Unemployment 6.4 6.3 6.8 7.2 7.6Overnight rate 3.9 4.2 2.7 2.3 2.9Government of Canada bonds 4.0 4.2 4.1 4.6 4.8Canadian dollar (in US$) $ 0.87 $ 0.88 $ 0.83 $ 0.77 $ 0.71
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28 MANAGEMENT’S DISCUSSION AND ANALYSIS ANALYSIS OF CONSOLIDATED RESULTS
ANALYSIS OFCONSOLIDATEDRESULTS
NET INCOME ANDCONTRIBUTION TO NETWORK
Caisse centrale’s contribution to the caissenetwork in 2006 reached $96.1 million, up13% from 2005 and representing a 13% returnon capital stock, comparable to 2005. Thisexceptional and steady increase is attributable to the development strategies adopted in recent years in all business segments.
The gross income of Caisse centrale stood at$188.8 million, up $27.1 million or 17% from2005 as a result of both net interest income and other income, which totalled $118.7 million and $70.1 million, respectively.
Caisse centrale’s net income rose 12% to $54.5 million from $48.5 million in 2005. The following sections provide a detailedanalysis of income and expenses.
NET INTEREST INCOME
Net interest income is the differencebetween the interest income earned onassets such as loans and securities, and the interest expense paid on liabilities such as deposits and debenture. Netinterest income is affected by interest rate fluctuations, funding strategies andthe composition of interest-earning andnon-interest-earning financial instruments.
Table I presents the changes in net interestincome by major asset and liability class. The last three columns in the table show the relative contribution of rate and volumechanges to assets and liabilities. The impact is broken down into its volume and ratecomponents.
In 2006, net interest income was up by $16.3 million or 16% from 2005, closing the year at $118.7 million. All businesssegments contributed to this growth.
The Capital Market segment saw its net interestincome jump 23% over 2005 to $54 millionprimarily as a result of liquid asset management.The strategies adopted made it possible to takeadvantage of the overall increase in marketrates, and also allowed Caisse centrale tobenefit from particularly attractive fundingconditions in 2006, thus reducing its financingcost. An equivalent of C$2.1 billion wasborrowed over the medium-term on theEuropean market by floating two issues.
Growth in this segment’s net interest incomewas accompanied by equivalent growth inother income.
The Financing segment generated a $5.1 million or 10% increase in net interestincome, even though a growing number ofbusinesses obtain financing through DesjardinsAcceptances. This income is recognized under“Other income”. Such growth in net interestincome is due chiefly to the 8% increase inaverage loan volume from $9.5 billion in 2005to $10.3 billion in 2006. Average interest ratesfor all the financing segments also rose,reflecting the overall increase in market rates. In addition, the average volume of privatesector loans expanded at an impressive 19% to $2.3 billion as a result of marketdevelopment efforts. Net interest income for this segment remained relatively stable,however, because of the general squeeze on margins in the market.
Overall, the net interest margin went from0.73% to 0.77% by the end of fiscal 2006.
OUTLOOK
Caisse centrale expects net interest income in fiscal 2007 to be similar to that in 2006.
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29ANALYSIS OF CONSOLIDATED RESULTS MANAGEMENT’S DISCUSSION AND ANALYSIS
Table I NET INTEREST INCOME ON AVERAGE ASSETS AND LIABILITIES
For the years ended December 31(in thousands of dollars)
2006 2005 2006 / 2005
Average Interest Average Average Interest Average Volume Rate Incamevolume rate volume rate gap gap gap
ASSETS Cash and securities $ 2,964,564 $ 145,410 4.90 % $ 2,722,527 $ 104,786 3.85 % $ 9,316 $ 31,308 $ 40,624Loans
Securities purchased underresale agreements 394,275 14,890 3.78 99,914 3,882 3.89 11,437 (429) 11,008Day to day 143,073 5,965 4.17 185,266 4,881 2.63 (1,112) 2,196 1,084Fédération
- treasury activities 2,591,660 114,559 4.42 2,627,897 77,118 2.93 (1,063) 38,504 37,441- financing activities 2,498,981 103,638 4.15 2,559,179 80,518 3.15 (1,894) 25,014 23,120
Other entities included in the scope of consolidation of Desjardins Group 1,112,887 60,635 5.45 888,957 43,000 4.84 10,832 6,803 17,635
Public and parapublic institutions 1,254,354 59,193 4.72 1,236,445 53,529 4.33 775 4,889 5,664Private sector1 2,289,691 150,165 6.56 1,930,601 96,288 4.99 17,910 35,967 53,877
10,284,921 509,045 4.95 9,528,259 359,216 3.77 28,526 121,303 149,829
Total interest-earning assets 13,249,485 654,455 4.94 12,250,786 464,002 3.79 37,826 152,627 190,453Other assets 2,171,719 — — 1,717,778 — — — — —
TOTAL ASSETS $ 15,421,204 $ 654,455 4.24 % $13,968,564 $ 464,002 3.32 % $ 48,253 $142,200 $190,453
LIABILITIES AND MEMBERS’ EQUITYDeposits
Payable on demand $ 635,977 $ 27,972 4.40 % $ 906,157 $ 22,419 2.47 % $(11,883) $ 17,436 $ 5,553Payable on a fixed date 10,621,247 501,823 4.72 9,432,713 332,933 3.53 56,155 112,735 168,890
Subordinated debenture 108,961 5,980 5.49 114,049 6,286 5.51 (279) (27) (306)
Total interest-bearing liabilities 11,366,185 535,775 4.71 10,452,919 361,638 3.46 43,049 131,088 174,137Other liabilities 3,266,070 — — 2,853,396 — — — — —Members’ equity 788,949 — — 662,249 — — — — —
TOTAL LIABILITIES AND MEMBERS’ EQUITY $ 15,421,204 $ 535,775 3.47 % $13,968,564 $ 361,638 2.59 %, $ 50,469 $123,668 $174,137
NET INTEREST INCOME $ 15,421,204 $ 118,680 0.77 % $13,968,564 $ 102,364 0.73 % $ 11,179 $ 5,137 $ 16,316
1 Average impaired loans, net of specific provisions, are included in this item.
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OTHER INCOME
Other income includes all income that isnot interest income.
Other income, which accounted for 37% of Caisse centrale's gross income, amounted to $70.1 million, versus $59.3 million a yearearlier, for an increase of $10.8 million or 18%. This growth was reflected in all business segments.
Foreign exchange income and trading activitiessignificantly contributed to the increase in otherincome. Gains of $8 million were posted as a result of Caisse centrale’s securitizationactivities, included in trading income, eventhough these activities were initiated only in the last quarter of 2005.
Foreign exchange activities, one of the corebusiness development areas favoured by Caisse centrale in recent years, posted growthof $5.6 million or 24% over the previous yearas a result of the success of our direct accessservice to foreign exchange traders, ourpreferred access service and the sales team’sefforts with commercial clients. As at December31, 2006, more than 579 business membershad signed up for the direct access service, oneof the most flexible in the industry, and 421,for the preferred access service.
As mentioned in the previous section, thedecision of certain businesses to obtainfinancing using Desjardins Acceptances ratherthan loans accounts for the substantial increasein commissions on Desjardins Acceptances. In particular, the average volume of DesjardinsAcceptances for the business units of theFédération des caisses Desjardins du Québecincreased by 24% in 2006.
Investment activity results are largely arisingfrom disposals of investments made tocapitalize on certain market conditions. In 2005, the investment strategies adopted had led to vigorous growth in other income as a result of gains on disposals. Theinvestment strategies adopted in 2006 yieldedsmaller gains, which were compensated for by an increase in net interest income generated by liquid asset management. It should benoted, however, that the composition ofCapital Market segment income can varyconsiderably depending on market conditions.
OUTLOOK
Caisse centrale expects other income to remainstable over the next fiscal year.
SEGMENT ANALYSIS
All segments contributed to the growth in totalincome in 2006, as shown in Table III.
Capital market
The Capital Market segment generated total income of about $93.6 million, up $17.4 million or 23% from a year earlier. Both net interest income and other incomerecorded exceptional growth, with the net interest margin for this segment up $10.2 million, and other income up $7.2 million.
The robust growth of the interest margin for this sector is attributable primarily to theinvestment strategies adopted, allowing certainmarket opportunities to be tapped, in particularreinvestments at higher interest rates. Inaddition, injections of capital stock contributedto the increase in investment income.
The growth in other income is mainly due tosecuritization activities and foreign exchangerevenue, which jumped 24% to $28.9 millionin 2006 as a result of the overall increase inforeign exchange volumes.
30 MANAGEMENT’S DISCUSSION AND ANALYSIS ANALYSIS OF CONSOLIDATED RESULTS
Table II OTHER INCOME
For the years ended December 31(in thousands of dollars)
2006 2005 $ Change
Service charges on chequing and deposit accounts $ 14,649 $ 13,724 $ 925Foreign exchange revenue 28,878 23,242 5,636Trading activities 4,384 (639) 5,023Investment activities 3,229 8,196 (4,967)Commissions on “Desjardins Acceptances” 9,751 8,120 1,631Credit fees 3,685 3,019 666Other 5,507 3,599 1,908
TOTAL $ 70,083 $ 59,261 $ 10,822
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31ANALYSIS OF CONSOLIDATED RESULTS MANAGEMENT’S DISCUSSION AND ANALYSIS
Financing
As also shown in Table III, growth in the volumeof private sector loans and of loans to Desjardinsentities resulted in a $5.1 million or 9.6%increase in the net interest margin for theFinancing segment.
In 2006, Caisse centrale made significantprogress in banking syndicates and in newmarkets. Caisse centrale also used its U.S.commercial lending branch to participate incross-border banking syndicates.
Based on well-adapted strategies, ourcontinued development efforts resulted in over$2 billion in new business, of which $1.6 billionwas in the corporate market segment.
In 2006 as well, a larger proportion of publicand parapublic sector entities and businessunits of the Fédération des caisses Desjardinsdu Québec opted to finance their activitiesthrough Desjardins Acceptances, generating the increase in fees on Desjardins Acceptancesrecorded under “Other income.” Overall, if netinterest income and other income are takeninto account, total income in the Financingsegment grew by $7.7 million or 11%.
Other
The “Other” segment posted a 15% increase in 2006, mainly from international activities.
International services as a whole grewsignificantly in 2006, especially because of thehigher volume of Import-Export activities suchas funds transfers and letters of credit. Thisincrease is also attributable to higher volumesof bank drafts and money orders and theresults of business development effortsassociated with the factoring product Export-D.It should be noted that the International ServiceCentre launched new treasury managementproducts which contributed to higher income.
PROVISION FOR CREDIT LOSSES
The provision for credit losses is an amountallocated during the year to the allowance forcredit losses to cover credit losses.
In 2006, the provision for credit losses chargedto income amounted to $16.8 million, up 11%from $15.2 million in 2005, despite a 24%increase in private sector loans. This situation isattributable to the improvement in the qualityof the loan portfolio in 2006.
A more detailed analysis of the specific provisionsfor credit losses is provided on page 41.
OUTLOOK
Even though Caisse centrale expects the overall provision for credit losses in 2007 to becomparable to the one in 2006, there may be a certain amount of volatility from one quarterto another.
Table III COMPONENTS OF NET INTEREST INCOME AND OTHER INCOME BY BUSINESS SEGMENT
For the years ended December 31 (in thousands of dollars)
2006 2005 $ Change
CAPITAL MARKET Net interest income $ 53,965 $ 43,709 $ 10,256Other income 39,600 32,417 7,183
93,565 76,126 17,439
FINANCING Net interest income 57,568 52,508 5,060Other income 22,180 19,536 2,644
79,748 72,044 7,704
OTHERNet interest income 7,147 6,147 1,000Other income 8,303 7,308 995
15,450 13,455 1,995
Total - Net interest income 118,680 102,364 16,316Total - Other income 70,083 59,261 10,822
TOTAL $188,763 $161,625 $ 27,138
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32 MANAGEMENT’S DISCUSSION AND ANALYSIS ANALYSIS OF CONSOLIDATED RESULTS
NON-INTEREST EXPENSE
Non-interest expense includes chargesrelated to personnel administration,premises, equipment and furniture andother operating expenses.
Table IV above shows the breakdown of non-interest expense by category. Non-interestexpense totalled $73.3 million in 2006,compared to $59.9 million in 2005. Thisincrease in expenses results primarily from a higher volume of activity attributable toincreased new business development and theimplementation of Desjardins Group’s strategictreasury function. In fact, most non-interestexpense categories increased in proportion togross income. However, one-time expenseswere incurred in 2006 in order to comply withincreased regulatory framework requirementsand to implement large-scale projects that willfavourably impact Caisse centrale’s long termefficiency.
In 2006, Caisse centrale completed the newmanagement applications and systems re-engineering project. This new technologysolution will support banking and loanmanagement activities, treasury operationssupport services, payment and accountingfunctions and management information.
Payroll and benefits accounted for almost halfof all non-interest expense. Hiringpredominantly temporary employees and overtime were required to completeimplementation of the above-mentionedproject. The increase in salary expense is alsodue to surplus volume and the growth inactivities. Such growth in activities and thelaunching of a new performance-basedremuneration program account for much of the $7 million increase in salaries and benefits.As at December 31, 2006, the number ofemployees (on a full-time equivalent basis)working for Caisse centrale and its U.S.subsidiaries was 347 in 2006, compared to 319 in 2005.
Significant professional fees were incurred tosupport strategic initiatives and implementlarge-scale projects such as the systems re-engineering and securitization projects.Furthermore, additional professional feesrelating to CSA requirements (NationalInstrument 52-109), the application of newaccounting standards for financial instrumentsand the audit of the conversion to the newmanagement software had to be incurred in2006. In all, professional fees increased by $3.6 million from a year earlier.
The increase in the amortization of premisesand equipment and intangible assets is mainlyattributable to the implementation ofmanagement systems and applications.
The $1.2 million or 14.6% increase insubcontracting expenses also stems primarilyfrom the much higher transaction volume. Thisincrease has resulted in supplementary revenuefrom service charges billed to our clients.
The $0.7 million or 12.6% increase incommunications and external relations fees in2006, can be traced to business developmentefforts such as the opening of a new branch in Florida.
OUTLOOK
Caisse centrale intends to continue to rigorouslymanage its non-interest expense, with a view to enhancing its financial performance. In 2007,non-interest expense should remain comparableto 2006.
Table IV NON-INTEREST EXPENSE
For the years ended December 31(in thousands of dollars)
2006 2005 $ Change
Salaries and benefits $ 35,146 $ 28,151 $ 6,995
Premises, equipment and furniture, including amortization Rent and taxes 2,717 2,440 277Amortization of premises and equipment and intangible assets 2,975 2,520 455Subcontracting 9,612 8,391 1,221Other 2,816 2,428 388
18,120 15,779 2,341
Other feesCommunications and external relations 6,254 5,554 700Professional fees 9,105 5,510 3,595Other 4,634 4,859 (225)
19,993 15,923 4,070
TOTAL $ 73,259 $ 59,853 $ 13,406
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33ANALYSIS OF CONSOLIDATED RESULTS MANAGEMENT’S DISCUSSION AND ANALYSIS
OTHER PAYMENTS TO THEDESJARDINS NETWORK
In cooperation with the Desjardins network,Caisse centrale offers a broad spectrum ofbanking and financing services and treasuryproducts to Canadian private and publicentities. Of the total fees collected, $27.9million was redistributed to the Desjardinsnetwork, including patronage allocations paidon interest margins on participating loans andforeign exchange transactions, for a 14.6%increase from December 31, 2005. This increaseis chiefly attributable to the patronage allocationspaid on foreign exchange transactions, whichrose by $3.7 million from 2005 as a result ofhigher volume.
OUTLOOK
Caisse centrale expects that its other paymentswill continue to grow over the next year.
INCOME TAXES AND OTHER TAXES
The higher income taxes charged to theconsolidated statements of income resulted fromthe higher net income and the 2005 tax ratechange, which had led to the recording offuture tax liabilities of $1.9 million.
In addition, when tabling his budget on May 2,2006, the federal Finance Minister announced aprogressive 1% corporate tax rate reduction in2008 and 2009. Following this announcement,Caisse centrale had to reduce its future incometax assets, which resulted in an increase in theincome tax expense for 2006. The budget alsocontained the elimination of the largecorportations tax in 2006, for which anexpense of $1.3 million had been recorded in 2005.
It should be noted that Caisse centrale canrecover a substantial portion of the incometaxes when it declares remuneration of capitalstock. Accordingly, a $15.6 million income taxrecovery was recorded in the statement ofretained earnings as a result of theremuneration of capital stock in 2006.
OUTLOOK
In 2007, the tax rates applicable to Caisse centraleshould remain stable.
REMUNERATION OF CAPITALSTOCK
Under the Act respecting the MouvementDesjardins (the “Constituent Legislation”), the Board of Directors of Caisse centrale maydeclare interest on capital shares; it thendetermines the terms of payment thereof. In2005, the Board of Directors of Caisse centraleapplied the principle of declaring, asremuneration of capital stock, an amountcorresponding to its non-consolidated netincome, including recovery of related incometaxes. However, given the capital requirementsfor the forthcoming years, the Board ofDirectors also accepted the principle ofsuspending the quarterly payment of theremuneration on capital stock, notably for the purpose of retaining amounts that could be quickly made available to Caisse centralewhen needed. For the year ended December31, 2006, interest of $68.2 million wasdeclared on subscribed and paid-up capitalshares. An amount of $64.6 million wasrecorded on the consolidated balance sheets as remuneration of capital stock payable.
Overall, amounts paid to the Desjardinsnetwork, including other payments tomembers, amounted to $96.1 million, up $10.9 million or 13% from $85.2 million in 2005.
OUTLOOK
Caisse centrale does not expect any change in its remuneration of capital stock policy in 2007.
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34 MANAGEMENT’S DISCUSSION AND ANALYSIS ANALYSIS OF QUARTERLY TRENDS
ANALYSIS OFQUARTERLY TRENDS
In the past two years, Caisse centrale’s quarterlyresults have been significantly influenced bymacroeconomic and regulatory changes in Canada and in the rest of the world.Macroeconomic changes may include theinterest rate situation, monetary policies andeconomic growth. Relevant quarterly financialinformation is presented on page 53.
In 2006, as in 2005, the quarterly change inresults can be explained primarily by fluctuatingincome from the Capital Market segment, and in particular income from trading activities,which are, by their very nature, more volatile.
ANALYSIS OFFOURTH QUARTERRESULTS
NET INTEREST INCOME
Net interest income for the three-month period ended December 31, 2006 totalled$33.4 million, up $10.2 million from the fourth quarter of 2005.
As previously explained, net interest income forthe Capital Market segment was up from 2005.The composition of revenues in this segmentmay, however, vary significantly from onequarter to the next. The increase in net interestincome was partially offset by the decrease inother income. Overall, the performance of theCapital Market segment in the fourth quarterof 2006 improved 8% over 2005, mainly as a result of the growth in foreign exchangeactivities and the return generated by liquidasset management.
Moreover, loan volume continued to expand, as observed in the first three quarters. The loanportfolio, including customers’ liability underacceptances, was up $623 million sinceSeptember 30, 2006.
OTHER INCOME
Other income stood at $11.5 million in thefourth quarter of 2006, versus $18 million inthe corresponding quarter in 2005. The mainreason for the change was the composition of the Capital Market segment’s revenues, as explained in the previous section.
PROVISION FOR CREDIT LOSSES
Caisse centrale recorded a provision for creditlosses of $5.4 million, versus $3.7 million in2005. In 2006, the provision was $1.6 millionhigher than in 2005, as a result of growth in the private sector loan portfolio and thedeterioration in the forestry sector in Quebec.
NON-INTEREST EXPENSE
Non-interest expense amounted to $24.1 million in the fourth quarter, up $7.8 million from the corresponding quarter in 2005. These higher expenses are mainly the result of the introduction of a newperformance-based remuneration program.
In addition, during the fourth quarter,additional professional fees relating to thesecurities authorities requirements (NationalInstrument 52-109), the application of newaccounting standards to financial instrumentsand the audit of the conversion to the newmanagement software had to be incurred.
Lastly, the increased amortization of premisesand equipment and intangible assets isprimarily attributable to the implementation of new management applications and systems.
OTHER PAYMENTS TO THEDESJARDINS NETWORK
Amounts redistributed to the Desjardinsnetwork totalled $7.0 million in the fourthquarter, up by $1 million from 2005 because of the 20% growth in foreign exchangerevenues over the last quarter of 2005.
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35COMMENTS ON ASSETS MANAGEMENT’S DISCUSSION AND ANALYSIS
Table V ASSET MIX
As at December 31(in millions of dollars)
2006 2005 2004 2003 2002
Cash and securities $ 3,973 23 % $ 3,500 22 % $ 2,967 20 % $ 3,731 28 % $ 3,935 36 %Loans 10,924 62 10,286 65 10,187 69 8,122 60 5,087 47Other 2,700 15 1,971 13 1,616 11 1,665 12 1,777 17
TOTAL $ 17,597 100 % $ 15,757 100 % $14,770 100 % $13,518 100 % $10,799 100 %
Average assets $ 15,421 $ 13,969 $12,885 $10,692 $10,722
COMMENTS ONASSETS
Total assets on the consolidated balance sheetof Caisse centrale amounted to $17.6 billion as at December 31, 2006, up more than $1.8 billion from the end of 2005. Averageassets increased by $1.5 billion or 10% over2005 to $15.4 billion in 2006.
Cash and securities totalled $4.0 billion at theend of 2006, compared to $3.5 billion as atDecember 31, 2005. One-time investmentsmade at year-end accounted for this increase.The liquidity ratio, consisting of cash andsecurities to total assets, was 23% at year-end,up from 22% at the close of the year in 2005.It should be borne in mind that the purpose ofCaisse centrale’s liquidities is essentially to meetregulatory requirements.
It is also worth mentioning that 61% ofsecurities held were securities issued orguaranteed by the federal and provincialgovernments, municipal, school or publiccorporations, as well as by Canadian banks.Note 3 to the consolidated financialstatements presents a detailed analysis of the securities portfolio.
At the end of 2006, the loan portfolio stood at $10.9 billion, up $638 million or 6% overthe previous year. Reflecting increased businessdevelopment activities, the private sector loanportfolio grew by 24%.
Fiscal 2006 was conducive to corporate mergersand acquisitions, allowing Caisse centrale tomake headway in its role as banking syndicatecoagent for Quebec enterprises in the corporatesegment. The involvement of Caisse centraleincluded Canada-wide financings or cross-border financings in the United States madethrough its new U.S. branch.
As forecast, loans to the Fédération des caissesDesjardins du Québec for financing activitieswere up by $484 million or 20% as a result of the higher business volume of certainDesjardins Group business entities. Similargrowth is expected for fiscal 2007. Loans to other entities included in the scope ofconsolidation of Desjardins Group declinedslightly to $873 million.
In addition, certain Desjardins Group businessentities financed more of their activities usingDesjardins Acceptances, which largely accountsfor the $399 million increase in Customers’liability under acceptances.
For more details about business members or other entities included in the scope ofconsolidation of Desjardins Group with which Caisse centrale carried out financingtransactions in the form of DesjardinsAcceptances, please refer to the DesjardinsGroup organization chart. As mentioned innote 17 to the consolidated financialstatements, transactions with the Fédérationdes caisses Desjardins du Québec for thebenefit of its member caisses are concludedunder more favourable conditions than thosegranted to unrelated third parties. Moreover,transactions concluded with the Fédération forits own financing needs and with other entities
included in the scope of consolidation ofDesjardins Group are carried out underconditions similar to those negotiated withunrelated third parties.
The heavy volume of mortgage loansecuritization activities totalling $1.3 billionaccounts for the fact that the volume of loansgranted to the Fédération des caisses Desjardinsdu Québec for treasury purposes remainedstable at $2.6 billion despite the Fédération’sincreased funding requirements.
In addition to these results, “Publi-privilège”securities and Desjardins acceptances wereissued. These instruments give public entitiesaccess to low-cost money market financing.Note that the “Publi-privilège” program does not appear on the balance sheet of Caisse centrale. This program is guaranteed by Caisse centrale, whose commitment ispresented under "Guarantees and standbyletters of credit" in note 16 to the consolidatedfinancial statements.
Other assets amounted to $2.7 billion in 2006,up 37% over the previous year, mainly as aresult of customers’ liability under acceptancesand assets related to derivatives, whosenotional amounts increased by 20% in 2006.
OUTLOOK
Caisse centrale expects to grow its balancesheet in 2007.
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36 MANAGEMENT’S DISCUSSION AND ANALYSIS COMMENTS ON ASSETS
Table VI LOAN PORTFOLIO - Net of allowance for credit losses
As at December 31(in millions of dollars)
2006 2005 2004 2003 2002
CompositionSecurities purchased under resale agreements $ 17 $ — $ 96 $ 15 $ 6 Day, call and short-term loans to investment dealers and brokers 234 205 446 218 159Public and parapublic institutions 1,526 1,477 1,455 1,523 918Members
Fédération- treasury activities 2,718 3,129 2,706 1,350 179- financing activities 2,927 2,443 2,737 2,370 1,875Other 70 73 44 — —
Other entities included in the scope of consolidation of Desjardins Group 873 955 961 1,032 291Loans purchased from Desjardins Group 78 5 — 134 206Private sector 2,569 2,071 1,803 1,570 1,532
Allowance for credit losses (88) (72) (61) (90) (79)
TOTAL $ 10,924 $10,286 $10,187 $ 8,122 $ 5,087
Geographic distribution (based on head office address)Quebec $ 9,330 $ 8,817 $ 8,939 $ 7,068 $ 4,676Other Canadian provinces 1,304 1,261 1,077 939 265International 290 208 171 115 146
TOTAL $ 10,924 $10,286 $10,187 $ 8,122 $ 5,087
Average loans $ 10,285 $ 9,528 $ 8,397 $ 5,949 $ 4,948
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37ANALYSIS OF CASH FLOWS AND OFF-BALANCE SHEET ARRANGEMENTS MANAGEMENT’S DISCUSSION AND ANALYSIS
ANALYSIS OF CASHFLOWS
As at December 31, 2006, cash and cashequivalents totalled $106.4 million, down $1.1 million from the previous year-end.
Cash flows used in operating activities amountedto $310.7 million, chiefly due to the increase intrading account securities and cash flows fromderivatives. In 2005, operating activitiesgenerated cash flows of $38.2 million as aresult of the decrease in unrealized gains andamounts receivable on derivatives.
In fiscal 2006, financing activities generatedcash flows of $1.3 billion due to the netincrease in deposits, partially offset by thedecrease in commitments under repurchaseagreements. In 2005, cash flows generated by such activities amounted to $591.7 million,attributable to higher deposits.
Lastly, investing activities required $965.7 millionin liquidities primarily as a result of the increasein loans and investment account securities. For the same reasons, the funds required forinvesting activities amounted to $617.6 millionin 2005.
OFF-BALANCE SHEETARRANGEMENTS
As part of its capital and liquidity managementstrategy, Caisse centrale engages in mortgageloan securitization transactions in the normalcourse of its business. These transactions involvethe use of off-balance sheet arrangements andspecial purpose vehicles. The special purposevehicle used by Caisse centrale is CanadaHousing Trust, set up by Canada Mortgage and Housing Corporation (“CMHC”) under theCanada Mortgage Bonds (“CMB”) Program.
In this type of transaction, Caisse centraletransfers mortgage-backed securities to thespecial purpose vehicle against money. The special purpose vehicle finances thesepurchases by issuing bonds to the investors.Under the terms of the CMB Program, swapcontracts must be entered into betweenCanada Housing Trust and Caisse centrale so that Caisse centrale receives all cash flowsrelated to securitized mortgage loansunderlying the mortgage-backed securities on a monthly basis, and pays interest to CanadaHousing Trust on the series of CanadaMortgage Bonds on a quarterly basis and the principal at maturity.
Securitization transactions are recorded as salesof assets only if Caisse centrale is deemed tohave surrendered control over the assets andhas received consideration other than beneficialinterests in these assets. At the time of the sale of the assets, Caisse centrale retains certain rights to excess interest spreads whichconstitute retained interests and assumesservicing of the transferred mortgage loans. No loss is expected on the mortgage loansbecause they are guaranteed by CMHC. Whereapplicable, any change in the value of theserights is recognized by Caisse centrale in theconsolidated results. As at December 31, 2006,total outstanding securitized mortgage loansamounted to $1.3 billion. Note 5 to theconsolidated financial statements provides moredetailed information on these transactions.
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38 MANAGEMENT’S DISCUSSION AND ANALYSIS RISK MANAGEMENT
RISK MANAGEMENTREVIEW
OVERVIEW
The risk management objective of Caisse centraleis to optimize the risk/return trade-off byapplying integrated management and controlstrategies, policies and processes to allfunctions of the organization.
Caisse centrale’s policies and processes aim to proactively identify, measure and assesspotential risks, and ensure their sound andprudent management, in particular byspecifying the controls to be applied and the reporting responsibilities to officers.
In June 2004, the Basel Committee on BankingSupervision approved a new accord (“Basel II”)intended to emphasize capital and promote theongoing development of risk assessmentcapabilities in financial institutions by closelyassociating capital requirements with modernrisk management methods. Caisse centrale, in conjunction with Desjardins Group, iscommitted to applying best practices in thearea of risk management. During the year, itcontinued to implement its Integrated RiskManagement and Basel Accord program(“IRMBA”). Such integrated management willpromote risk identification and measurement as well as optimal allocation of capital, and willbecome integrated with strategic planning andperformance evaluation. Extensive work oncredit, liquidity, market and operational riskswas done in 2006 and will be continued incoming years in order to finetune our globalvision of risk and its integration into the overallmanagement of the Group’s activities.
In addition to the ongoing risk monitoringperformed by the management and businessunit managers of Caisse centrale, the oversightof integrated risk management is theresponsibility of the Board of Directors, the risk management, credit and investment, andaudit commissions, the board of ethics andprofessional conduct, and the managementcommittees of Caisse centrale.
The activities of the new U.S. branch aresubject to specific oversight performed by ateam of Senior Management members. Duringthe year, the Board of Directors adopted thepolicies required by the applicable regulations.
COMMITTEES AND COMMISSIONS OF THE BOARD OFDIRECTORS OF CAISSE CENTRALE1
Board of Directors
n Ensures that Caisse centrale has an adequate strategic managementprocess that includes risk assessment.
Corporate Governance Commission
n Supervises the program to evaluate Board effectiveness.
n Recommends the orientation and professional development program for Board members.
n Examines the roles of the Board of Directors and its committees.
Human Resources Commission
n Ensures that the compensation plan is compatible with therealization of objectives and the prudent management of activitiesand risks.
Risk Management Commission
n Assesses actions taken and organization set up to manage risks to which Caisse centrale may be exposed.
n Recommends oversight, approval limits, and rules and techniques for risk management.
n Is informed of changes made to risk management methods and limits.
n Examines reports from Management on material risks and oncompliance with risk management limits, and ensures theimplementation and monitoring of the required measures for improvement.
n Examines key risk management findings from independentsupervisory functions.
Credit and Investment Commission
n Determines the credits to be granted by Caisse centrale as well as investments and loans and other financial commitments, andaccordingly exercises the necessary authority under the generalpolicies adopted by the Board of Directors.
Audit Commission
n Ensures that Caisse centrale has an ongoing, adequate and effectiverisk management process and that its major risk managementpractices are complied with.
n Ensures, in keeping with the Risk Management Commission, thatrisks that could affect financial reporting are properly managed and controlled.
n Obtains the opinion of the Group’s internal auditor and externalauditors on the financial reporting risks of Caisse centrale.
n Ensures that the risk management activities of Caisse centrale arereviewed periodically.
n Reviews the processes on which certification by the Chief ExecutiveOfficer and the Chief Financial Officer of Caisse centrale is basedunder Multilateral Instrument 52-109 (Certification of Disclosure inIssuers’ Annual and Interim Filings). The Audit Commission ensuresthat these processes constitute a reasonable strategy and areexecuted diligently.
n Assists the Board of Directors in its management and monitoringresponsibilities regarding the regulatory compliance of Caisse centrale.
Board of Ethics and Professional Conduct
n Ensures compliance with rules of professional conduct regarding,among other matters, conflicts of interest and self-dealing.
1 Please refer to the Corporate Governance section of this Annual Report for a more detaileddescription of the roles and responsibilities of the committees and commissions of the Board ofDirectors of Caisse centrale.
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39RISK MANAGEMENT MANAGEMENT’S DISCUSSION AND ANALYSIS
MANAGEMENT COMMITTEES OF CAISSE CENTRALE1
Management Committee
n Determines the mandate and composition of the managementcommittees of Caisse centrale.
n Specifies the strategic orientations, performance objectives and risk limits for Caisse centrale.
n Approves delegation powers and limits for the managementcommittees of Caisse centrale.
n Monitors hedging strategies in order to maintain risk exposurewithin the limits approved by the Board of Directors.
Risk Management Committee
n Evaluates and revises risk management and treasury policies.
n Ensures that risks are managed in accordance with establishedpolicies.
n Reviews risk assessment program results.
n Ensures the implementation of and compliance with controlprocedures.
n Examines the impacts of framework and management methoddevelopments regarding the activities of Caisse centrale.
n Reviews governance and compliance activities.
Internal Credit Committee
n Defines parameters for granting credit and monitors their application.
n Authorizes loans within its limits or refers them to higher levels.
n Reviews impaired loans and loans on the watch list.
n Reviews loan delinquency and credit losses.
Disclosure Committee
n Supervises the appropriate cutoff and reliability of financialdisclosures in annual and interim filings.
n Ensures that the financial disclosures do not omit any material factsor do not contain any misrepresentations or misleading informationregarding such facts.
n Ensures that the financial disclosures do not omit any material factsor do not contain any misrepresentations or misleading informationregarding such facts.
1 Please refer to the Corporate Governance section of this Annual Report for a more detaileddescription of the roles and responsibilities of the committees and commissions of the Board ofDirectors of Caisse centrale.
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40 MANAGEMENT’S DISCUSSION AND ANALYSIS RISK MANAGEMENT
CREDIT RISK
Credit risk is the risk of credit losses that canoccur if a borrower or a counterparty fails tohonour its contractual obligations, whether or not presented in the balance sheet.
CREDIT RISK MANAGEMENT
Diversification is a key part of riskmanagement. To improve the quality of itscredit portfolio, Caisse centrale has made a commitment to reduce its exposure bydiversifying risk among categories ofborrowers, industries, types of financing and geographic regions.
Credit losses can occur if a borrower orcounterparty does not fully honour itscontractual obligations to Caisse centrale.These obligations can involve loans,commitments, guarantees and derivativecontracts with positive replacement values.
Managing credit risk has both quantitative andqualitative aspects. Experienced credit officersevaluate the credit quality of counterparties and assign internal credit ratings based on thisevaluation. These officers, who have directknowledge of clients and their industry sectors,are responsible for credit screening andmonitoring credit risks, which are reviewed by an independent department. Creditconcentration limits for various industries,products and geographic regions are set by the Internal Credit Committee and approved by the Board of Directors. This committee setscredit limits for clients and counterparties whichare also approved by the Board of Directors.Members of the Risk Management Commissionof the Board of Directors periodically review theauthorized limits and their monitoring.
The quantitative aspect of examining credit riskconsists of measuring Caisse centrale’s creditexposure to each counterparty. The InternalCredit Committee is responsible for monitoringthe policies and practices to measure such risk.Credit exposure is measured in terms of bothcurrent and potential credit exposure. Currentcredit exposure is represented by the notionalor principal value for on-balance sheet financialinstruments and by the replacement value forderivative instruments. Caisse centrale alsoestimates potential credit exposure byconsidering its sensitivity to market changes.
These elements are subject to review, as areproducts and client-credit risks requiringoversight. These risks are examined regularly bythe Internal Credit Committee. This Committeeevaluates the adequacy of the provisions forcredit losses and informs the members of the commissions that support the Board ofDirectors regarding risk management of thecredit amounts that should be written off andthe amount of any provision for credit losses.
CREDIT POLICIES
Over the years, Caisse centrale has developedand adopted credit policies and practices toreact rapidly and take appropriate measures tomitigate or minimize file exposures. The generalcredit policy regarding borrowers and the policyon issuers and counterparties or foreigncorrespondents are revised annually. During theyear, significant effort was made to enhancethe quality of the loan portfolio. Wheneverrequired, collection or turnaround of higher risk files is transferred to specialized teams.
Follow-up procedures are designed to ensuredetection of deteriorating loan risk in order tomanage the risk or act on it immediately. Loanscan then be classified as impaired loans, and covered by a specific provision at theappropriate time. The adequacy of the specificprovision is reassessed on a quarterly basis.
The general credit policy sets forth theprinciples and limits within which financingtransactions involving a credit risk must be
conducted as well as their requisiteauthorizations. The policy enhances control and diversification of the commitmentsportfolio while favouring orderly businessdevelopment. It defines borrowers’ eligibilitycriteria and establishes the credit riskassessment mechanisms and the types offinancing available. It also establishes themonetary, sector-related, geographic, risk andterm limits in order to ensure the desired levelof diversification of the loan portfolio. Finally,the policy establishes the levels of authorizationand delegations of authority required for theapproval and management of creditcommitments.
Borrower limits are based on a customer’s risk rating and the maximum commitmentdetermined by Desjardins Group’s creditmanagement framework. Credit commitmentlimits for each sector of activity in the privateportfolio cannot exceed 15% of the aggregateof the credit commitments in this sector withoutthe prior authorization of the Credit andInvestment Commission. At year-end, all sectorsof activity were in compliance with this limit.
Caisse centrale also negotiates with foreigncorrespondents. International transactionsinvolving credit risk are governed by theinternational services credit policy. Morespecifically, this policy ensures soundapportionment of Caisse centrale’s foreign risks by setting out eligibility criteria forcountries and correspondents, monetary limitsby country and correspondent, and term limits.
The loan portfolio of Caisse centrale is verydiversified. Business segment loans from allsectors of the economy account for slightlymore than 20% of outstanding loans (Table VII).Caisse centrale monitors the economic sectors inwhich it is involved on an ongoing basis.
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41RISK MANAGEMENT MANAGEMENT’S DISCUSSION AND ANALYSIS
IMPAIRED LOANS
A loan is considered to be impaired and theinterest thereon ceases to be recorded when (a) there is reason to believe that a portion ofthe principal or interest cannot be collected or(b) the interest or principal is contractually 90days in arrears, except where the loan is fullyguaranteed or is in collection. Further details on the accounting policies used are provided innote 2 to the consolidated financial statements.
The quality of the loan portfolio continues tobe excellent. Gross impaired loans amounted to $18.0 million at year-end, compared to$10.3 million in 2005, and their coverage by specific provisions reached 38% as atDecember 31, 2006. It is worth noting thatthese loans represent only 0.16% of netaggregate loans in a $11.0 billion portfolio.
Caisse centrale management intends to continueto closely monitor its loan portfolio as part of a cautious approach toward credit riskmanagement in order to maintain asset quality.
ALLOWANCE FOR CREDIT LOSSES
As demonstrated in the foregoing sections,Caisse centrale will continue to rigorouslymanage its loan portfolio. The quality of the loanportfolio was maintained in 2006, as evidencedby the low proportion of impaired loans.
The provisions specifically related to particularelements of the loan portfolio were slightlyincreased in comparison to 2005. Consequently,these provisions amounted to $6.8 million,compared to $3.8 million at the same date in2005. Table VIII provides the breakdown ofspecific provisions by industry. The generalprovision for credit losses was increased to$81.1 million as at December 31, 2006, from$68.3 million a year earlier. It is determined bythe credit rating, maturity dates, default
probabilities, volatility, the type of security, and the expected collection. It also takes intoaccount the economic cycle as well as thediversification of the counterparties and theeconomic and geographic sectors of activity of the credit portfolio. This assessment isexamined and reviewed where conditionsindicate that initial assumptions will not applyto actual results. Further details on ouraccounting policies are provided in note 2 to the consolidated financial statements.
Consequently, at the close of 2006, the specificand general provisions amounted overall to$87.9 million. This amount represented 3.4%of the private sector loan portfolio and 0.8% of the total portfolio.
Table VII PRIVATE SECTOR
Outstandings as at December 31(in millions of dollars)
2006 2005
Primary industries $ 69 3 % $ 35 2 %Manufacturing industries
Food and tobacco 106 4 150 7Textiles, rubber and plastics 48 2 28 1Pulp and paper 71 3 64 3Metal products 156 6 159 8Produits de métal 68 3 58 3Other 40 2 57 3
Construction 32 1 23 1Transportation and warehousing 71 3 75 4Communications 190 7 12 1Public services 83 3 73 3Retail and wholesale trade 251 10 221 11Financial intermediaries 396 15 297 14Real estate 197 8 158 8Public administration, education and health services 72 3 77 4Lodging, restaurants and entertainment 86 3 92 4Other services and associations 148 5 94 4Other 484 19 398 19
TOTAL $ 2,569 100 % $ 2,071 100 %
Table VIII BREAKDOWN OF SPECIFIC PROVISIONS
As at December 31(in thousands of dollars)
2006 2005 2004 2003 2002
Manufacturing industries $ 6,800 $ 3,500 $ 7,610 $ 11,800 $ 1 650Transportation and warehousing — 250 250 250 250Telecommunication — — — 34,500 34 500Other — — 19 5 —
TOTAL $ 6,800 $ 3,750 $ 7,879 $ 46,555 $ 36 400
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42 MANAGEMENT’S DISCUSSION AND ANALYSIS RISK MANAGEMENT
MANAGING LIQUIDITY ANDSOURCES OF FUNDING
Liquidity and financing are managed in amanner to ensure that Caisse centrale can meetits members’ and customers’ needs at all times.As the Group’s treasurer, it must implement theappropriate strategies to measure and controlrisks affecting the institution, temporary risksfrom mismatching of asset and liabilitymaturities, structural risks that would magnifythe weaknesses in the institution’s balancesheet or any possible market risks associatedwith a highly disrupted economy orextraordinary events.
Caisse centrale has prepared a policy onliquidity adequacy and administration as well as a funding management policy. The Board ofDirectors is responsible for authorizing thesepolicies, and the Senior Vice-President, Treasury ofDesjardins Group is in charge of applying them.
Quarterly reports on measurement and controlcomponents are filed quarterly with the RiskManagement Commission by the Senior Vice-President, Integrated Risk Management.
In addition, a treasury operations recovery planhas been drawn up; updated on a regular basis,it would enable the institution to deal withcontingencies in order to keep currentoperations functioning at an adequate level.
LIQUIDITIES
In 2006, Caisse centrale continued theintegration of its treasury operations incompliance with the program to reinforceDesjardins Group’s strategic managementstructure, which was issued by DesjardinsGroup in 2004. Borrowing decisions andvarious matching strategies of componentswere thus aligned with Caisse centrale’s treasuryoperations so as to achieve greater synergies.
Moreover, in recent years, greater planning has been required as a result of vigorous growthin the residential mortgage market, whichsignificantly exceeds the amount of savingscollected from individuals. In 2005, thedeliberate $1.5 billion reduction in requiredreserves of liquidity made it possible to bridgethe gap. However, in 2006, Caisse centraleincreased its borrowing level on capital marketsand, in conjunction with the officers of theFédération des caisses Desjardins du Québec, it stepped up its use of the mortgage loansecuritization program.
Securitization through participation in theCanada Mortgage Bonds program reached $1.4 billion at the end of 2006, whereas Caisse centrale’s deposit liabilities grew from$11.9 billion at the end of 2005 to $13.4 billionas at December 31, 2006. In this regard, theequivalent of $2.1 billion in Canadian dollarswas borrowed over the medium term on theEuropean market by floating a €500 millionissue of deposit notes in January, due in 2011,and another issue in June for a record €1 billion,due in 2010.
Although the robust growth in mortgage loansput pressure on liquidities, Caisse centralemaintained a much higher level of securities than required by regulations.
Furthermore, a very high proportion of thesecurities are investment-grade securities and would enable Caisse centrale to respondpromptly to any upswing in customerrequirements. Over 95% of securities ofCanadian issuers other than governments havereceived a rating of at least R-1M (based on the DBRS classification).
At December 31, 2006, securities totalled $3.8 billion compared to $3.3 billion at the end of the previous year.
Table IX CASH AND SECURITIES
As at December 31(in millions of dollars)
2006 2005 2004 2003 2002
Cash and deposits with other financial institutions $ 168 $ 151 $ 124 $ 112 $ 67SecuritiesCanada 289 444 422 681 531Provinces and public bodies 847 944 1,293 1,405 1,511Other issuers 2,669 1,961 1,128 1,533 1,826
TOTAL $ 3,973 $ 3,500 $ 2,967 $ 3,731 $ 3,935
Average liquidity $ 2,964 $ 2,723 $ 2,886 $ 3,272 $ 4,231
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FUNDING SOURCES
One component of Caisse centrale’s mission is to assume the strategic role of supplier offunds to the Desjardins network. Over theyears, Caisse centrale has built national- andinternational-scale funding sources by varyingthe markets, financial instruments, maturitydates and currencies of its deposits.
Charts I and II and Table X present thebreakdown of deposits and debenture as at December 31, 2006 by currency, by program and by maturity.
In 2006, rating agencies renewed the top creditratings assigned to Caisse centrale, thus givingit access to attractive funding sources. Like themajor Canadian banks, the credit rating forCaisse centrale’s short-term debt was increasedfrom R-1M to R-1H by DBRS. DBRS modified itsanalytical method in 2006 to attribute a highervalue to the balance sheet liquidity of Canada’smain financial institutions.
In addition to resorting to the Canadian moneymarket primarily through the issue of bearerterm notes and Desjardins Acceptances, Caisse centrale is involved on capital marketsusing the following instruments:
On the Canadian market:
• a medium-term deposit note program of $5 billion, allowing a public offering of thedeposits issued.
On the international market:
• a short-term European deposit note programof US$600 million;
• a short-term American deposit note programof US$1 billion;
• a European multi-currency medium-termdeposit note program of US$7 billion.
In 2006, in addition to floating two issues ofmedium-term deposit notes in Europe andparticipating in the Canada Mortgage Bondsprogram, Caisse centrale was active on theCanadian money market. Outstanding short-termnotes and Desjardins Acceptances totalled closeto $4 billion at year-end.
43RISK MANAGEMENT MANAGEMENT’S DISCUSSION AND ANALYSIS
Table X DEPOSITS BY MATURITY
As at December 31(in millions of dollars) Payable on a fixed date
Payable Within Over 3 to Over 1 to Over Total Totalon demand 3 months 12 months 5 years 5 years 2006 20051
Canada $ 3 $ 252 $ — $ — $ — $ 255 $ 422Provinces 139 157 — — — 296 591Banks and financial institutions — 725 — — — 725 857Members
Fédération 1,303 547 62 119 — 2,031 1,062Other 105 159 18 56 — 338 64
Other entities included in the scope of consolidation of Desjardins Group 248 543 175 22 — 988 823
Other 324 3,193 502 4,771 8 8,798 8,130
TOTAL $ 2,122 $ 5,576 $ 757 $ 4,968 $ 8 $13,431 $ 11,949
1 Reclassified to conform to current year’s presentation.
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16 % Demand deposits
19 % Short-term deposits - Canada
8 % Short-term deposits - US & Euro
3 % Medium-term deposits - Canada
34 % Medium-term deposits - Europe & debenture
13 % Entities included in the scope of consolidationof Desjardins Group
DEPOSITS AND DEBENTUREBY PROGRAMAs at December 31, 2006
CHART II
1. 50 % Canadian dollars
2. 17 % U.S. dollars
3. 33 % Euros
DEPOSITS AND DEBENTURE BY CURRENCYAs at December 31, 2006
CHART I
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1. 63 % Banks
2. 28 % Members and other entities includedin the scope of consolidationof Desjardins Group
3. 6 % Private sector
4. 3 % Government
DERIVATIVE NOTIONAL AMOUNTSBy counterparty
CHART IV
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3. 4.
1. 36 % Within 1 year
2. 34 % 1 to 3 years
3. 25 % 3 to 5 years
4. 5 % Over 5 years
DERIVATIVE NOTIONAL AMOUNTSBy maturity
CHART V
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CHART III 2006 VALUE-AT-RISK
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16 % Demand deposits
19 % Short-term deposits - Canada
8 % Short-term deposits - US & Euro
3 % Medium-term deposits - Canada
34 % Medium-term deposits - Europe & debenture
13 % Entities included in the scope of consolidationof Desjardins Group
DEPOSITS AND DEBENTUREBY PROGRAMAs at December 31, 2006
CHART II
1. 50 % Canadian dollars
2. 17 % U.S. dollars
3. 33 % Euros
DEPOSITS AND DEBENTURE BY CURRENCYAs at December 31, 2006
CHART I
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1. 63 % Banks
2. 28 % Members and other entities includedin the scope of consolidationof Desjardins Group
3. 6 % Private sector
4. 3 % Government
DERIVATIVE NOTIONAL AMOUNTSBy counterparty
CHART IV
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3. 4.
1. 36 % Within 1 year
2. 34 % 1 to 3 years
3. 25 % 3 to 5 years
4. 5 % Over 5 years
DERIVATIVE NOTIONAL AMOUNTSBy maturity
CHART V
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CHART III 2006 VALUE-AT-RISK
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44 MANAGEMENT’S DISCUSSION AND ANALYSIS RISK MANAGEMENT
Since early 2007, Caisse centrale has beenplanning a new issue of medium-term depositnotes in Europe, at costs which, once hedgedagainst foreign exchange risk, would be lowerthan those it would be required to assume onthe Canadian market, with the repeatedobjective of securely anchoring Desjardins creditto the reference curve. As at December 31,2006, funding in euros accounted for 33% ofaggregate funds.
As at December 31, 2006, outstanding deposits(Table X) stood at $13.4 billion, up $1.5 billionfrom $11.9 billion in the previous year. Depositspayable on demand totalled $2.1 billion anddeposits payable on a fixed date increased by$257 million during the year to $11.3 billion at year-end.
Given the strong demand for funding by thecaisse network for residential purposes on thepart of members or for the deployment ofalternative savings investment strategies,
Desjardins increased, through Caisse centrale,the level of its borrowings with wholesalesuppliers. The amount of funds borrowed oninstitutional markets has steadily increased overthe past several years to constitute more than80% of Caisse centrale’s deposit liabilitiespayable on a fixed date. Even though high, thispercentage is still limited, given Caissecentrale’s role as Desjardins Group’s treasurer,compared with its main competitors.
Deposits payable on demand as at December31, 2006 were much higher than the previousyear’s levels as a result of commitments underrepurchase agreements made at the end of theyear by Desjardins Group entities.
The proceeds from the two issues of medium-term deposit notes in Europe had the effect ofextending the average term of Caisse centrale’sdeposit liabilities payable at a fixed date; it was496 days at the end of 2006, and nearly 45%of maturities are longer than one year.
In 2007, Caisse centrale expects to continue itsmedium-term funding strategy to meet thegrowing needs of the caisse network and toreduce the risk of market uncertainties. It is alsoplanning to borrow again over the mediumterm in Europe and to participate in theCanada Mortgage Bonds program to the same extent as in 2006.
Table XI DEPOSITS AND SUBORDINATED DEBENTURE
As at December 31(in millions of dollars)
2006 20051 2004 2003 2002
Canada $ 255 $ 422 $ 199 $ 101 $ 15Provinces 296 591 177 301 344Banks and financial institutions 925 857 799 932 166Members
Fédération 1,870 1,062 1,071 1,033 1,951Other 137 64 198 206 274
Other entities included in the scope of consolidation of Desjardins Group 1,190 823 572 707 507
Other 8 758 8,130 8,226 6,842 4,531
13,431 11,949 11,242 10,122 7,788Subordinated debenture 117 105 124 124 126
TOTAL $ 13,548 $ 12,054 $ 11,366 $10,246 $ 7,914
Average volume $ 11,366 $ 10,453 $ 9,795 $ 7,977 $ 8,004
1 Reclassified to conform to current year’s presentation.
Geographic Distribution
2006 2005 2004 2003 2002
Canada $ 7,112 52 % $ 7,609 63 % $ 7,048 62 % $ 6,489 63 % $ 4,519 57 %International 6,436 48 4,445 37 4,318 38 3,757 37 3,395 43
TOTAL $ 13,548 100 % $ 12,054 100 % $ 11,366 100 % $ 10,246 100 % $ 7,914 100 %
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45RISK MANAGEMENT MANAGEMENT’S DISCUSSION AND ANALYSIS
MARKET RISKMANAGEMENT
Market risk is the risk that results from changesin the market value of financial instruments dueto a fluctuation in the parameters affecting thisvalue; notably interest and foreign exchangerates and their volatility. The risk of lossesrelated to interest rate and foreign exchangerate volatility is the main component of marketrisk to which Caisse centrale is exposed. Theestimation of potential losses is a key elementof managing risk.
The integrated risk management group, whichis independent from the sectors initiatingtransactions, is responsible for examiningmarket risk exposure on a daily basis. It ensuresthat risks remain within the set limits and thatonly authorized activities are undertaken, anddevelops and implements risk assessmentmodels. It reports daily to senior managementon profits and losses, value-at-risk (“VAR”) and compliance with limits with respect tomaximum losses resulting from a one-basispoint change in interest rates on unmatchedpositions. The independent risk managementunit is responsible for periodically examiningmodels and valuations.
VAR is a generally accepted risk measurementconcept that uses statistical models andinformation on historical market prices tocalculate, within a given confidence level, the maximum loss in market value that Caisse centrale would sustain in its asset/liabilitymanagement portfolios from adverse movementsin market rates and prices in a single day. Caisse centrale’s VAR is based on a 99% and95% confidence level and represents an estimateof the maximum loss that Caisse centrale could sustain in its portfolios.
Management recognizes that VAR is not anabsolute measurement of market risk and thatits use is limited, since it is based solely onhistorical information. Management thereforeuses various measures and information to helpit assess and control the market risks to whichits products and portfolios will be exposed.
Chart III presents the daily changes in theoverall VAR of Caisse centrale’s asset/liabilitymanagement portfolios in Canadian dollarsduring 2006. Based on a 99% confidence level,the average VAR amounted to $84,000 in2006.
INTEREST RATE RISK MANAGEMENT
Interest rate risk is the sensitivity of Caisse centrale’sfinancial condition to interest rate movements.The magnitude and direction of the effectdepend on the assets and liabilities which aresubject to repricing in a given period.
Caisse centrale can lower or eliminate this risk bychanging the mix of assets and liabilities or usingderivative instruments.
Exposure to interest rate risk is examined on aregular basis by the Management Committee.This committee establishes Caisse centrale’sposition in view of anticipated interest ratechanges and recommends hedging any undesiredor unexpected interest rate risk.
Note 14 to the consolidated financial statementsshows Caisse centrale’s position with regard tointerest rate sensitivity as at December 31, 2006,in accordance with the guidance of Section 3860of the CICA Handbook, “Financial Instruments –Disclosure and Presentation”. Balance sheet and off-balance sheet assets and liabilities arepresented in the table based on the earlier of thematurity date or the contractual repricing date.This is the position at that particular date, butcould have subsequently changed, taking intoaccount forecasted interest rates and clients'preferences for products and terms.
Caisse centrale is very prudent with regard tointerest rate sensitivity. Various means are used to monitor and manage interest rate risk. Inaddition, Caisse centrale has established policiesdescribing risk management principles andprocedures, and periodic reports are filed withthe Risk Management Commission.
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16 % Demand deposits
19 % Short-term deposits - Canada
8 % Short-term deposits - US & Euro
3 % Medium-term deposits - Canada
34 % Medium-term deposits - Europe & debenture
13 % Entities included in the scope of consolidationof Desjardins Group
DEPOSITS AND DEBENTUREBY PROGRAMAs at December 31, 2006
CHART II
1. 50 % Canadian dollars
2. 17 % U.S. dollars
3. 33 % Euros
DEPOSITS AND DEBENTURE BY CURRENCYAs at December 31, 2006
CHART I
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1. 63 % Banks
2. 28 % Members and other entities includedin the scope of consolidationof Desjardins Group
3. 6 % Private sector
4. 3 % Government
DERIVATIVE NOTIONAL AMOUNTSBy counterparty
CHART IV
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3. 4.
1. 36 % Within 1 year
2. 34 % 1 to 3 years
3. 25 % 3 to 5 years
4. 5 % Over 5 years
DERIVATIVE NOTIONAL AMOUNTSBy maturity
CHART V
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46 MANAGEMENT’S DISCUSSION AND ANALYSIS RISK MANAGEMENT
FOREIGN EXCHANGE RISKMANAGEMENT
Caisse centrale has assets and liabilitiesdenominated in a number of foreign currencies.Foreign exchange risk arises when the actual or forecasted assets in a foreign currency areeither greater or lesser than the liabilities in that currency. Caisse centrale has establishedspecific foreign exchange risk managementpolicies.
OFF-BALANCE SHEET CREDITINSTRUMENTS AND DERIVATIVES
In the normal course of its business, Caisse centrale offers its clients variousproducts to meet their liquidity requirementsand protect them against a number of riskssuch as fluctuations in interest and exchangerates. Caisse centrale uses some of theseproducts itself to manage its own risksassociated with fluctuating interest andexchange rates. These products can be dividedinto two broad categories: off-balance sheetcredit instruments and derivatives.
All off-balance sheet credit instruments andderivatives are subject to Caisse centrale’s usualcredit standards, financial controls, risk ceilingsand monitoring procedures. Caisse centraleconstantly improves its risk managementsystems and valuation models for theseproducts. In the opinion of Management, thesetransactions do not represent an unusual riskand no material losses are anticipated as aresult of these transactions. Notes 2 and 16 tothe consolidated financial statements providefurther details on these instruments and theiraccounting.
OFF-BALANCE SHEET CREDITINSTRUMENTS
Products in this category, which consist ofguarantees, standby letters of credit,commitments to extend credit andcommitments to purchase assets, are designedto provide clients with funds for anticipatedneeds. Since conditional commitments toextend credit are subject to clients’ compliancewith particular credit standards, the riskassociated with such commitments is reducedconsiderably. A binding commitment requires
a duly signed offer, including confirmation of acceptance by the customer. In such cases,Caisse centrale must pay out the amountspecified in the commitment even if thecustomer is unable to meet its financial orcontractual obligations. Caisse centrale takesthese commitments into consideration in itsforward-looking management of liquidity needsto be met. Table XII presents off-balance sheetcredit instruments by maturity over the nextfew years.
CONTRACTUAL COMMITMENTS ANDGUARANTEES
In the normal course of its business, Caisse centrale, like other major Canadianfinancial institutions, pledges part of its liquidassets in order to participate in the clearingand payments systems. It also enters intolong-term leases or service contracts entailingminimum future payments. Table XIII presentsthe contractual commitments by maturityover the next years. Further details are alsoprovided in note 16 to the consolidatedfinancial statements.
Table XII OFF-BALANCE CREDIT INSTRUMENTS - Notional Amount Maturities
As at December 31(in millions of dollars)
Less than 1 to 3 Over 3 to Over 5 Total Total1 year years 5 years years 2006 2005
Guarantees and standby letters of credit 308 $ 189 $ 109 $ 2 $ 608 $ 444 $Commitments to extend credit 7,624 355 986 20 8,985 9,024Commitments to purchase assets 13 — — — 13 7
TOTAL 7,945 $ 544 $ 1,095 $ 22 $ 9,606 $ 9,475 $
Table XIII CONTRACTUAL COMMITMENT MATURITIES
As at December 31(in thousands of dollars)
2012 2007 2008 2009 2010 2011 and next Total
$1,811 $1,524 $1,509 $1,473 $1,293 $7,126 $14,736
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47RISK MANAGEMENT MANAGEMENT’S DISCUSSION AND ANALYSIS
DERIVATIVES
Derivative financial instruments are financialcontracts which derive their value from theunderlying price, interest or exchange rate orindex. Derivatives include many financialcontracts such as futures, interest rate, currencyand credit swaps, forward rate agreements,forward exchange contracts and options.Derivatives are a key risk management tool,both for Caisse centrale and for its clients. Adescription of derivatives and their use byCaisse centrale is provided in note 12 to theconsolidated financial statements.
Derivatives, like balance sheet financialinstruments, are subject to market and creditrisk. As outlined in the “Risk Management”section, Caisse centrale evaluates the riskassociated with derivatives in much the sameway as the risks associated with other financialinstruments. However, unlike balance sheetfinancial instruments, where credit exposure isgenerally represented by the nominal orprincipal value, the credit exposure associatedwith derivatives is generally a small fraction ofthe notional amount of the instrument and isrepresented by the positive market value of thederivative. The various derivatives allow for thetransfer, modification or reduction of foreign
exchange and interest rate risks stemming fromvariations thereof. The vast majority of currencyand interest rate swaps, forward exchangecontracts and options are transacted withbanks, members or other entities included inthe scope of consolidation of Desjardins Group.
As illustrated in Table XIV, outstandingderivative and credit instruments increased by18% or $19.7 billion as at year-end.
The most pronounced increase was in interestrate contracts, the value of which havingincreased by 17% to $100.6 billion from a yearearlier, especially in transactions with othercounterparties, reflecting the businessdevelopment efforts of the new derivativesteam.
Chart IV shows the distribution of derivativenotional amounts by counterparty type.Measured by notional amounts, 63% ofcounterparties were banks. Members and otherentities included in the scope of consolidationof Desjardins Group accounted for 28%. Itshould be remembered that Caisse centrale actsas an intermediary to meet the Desjardinsnetwork’s needs in terms of derivativeinstruments. Additional information on thetransactions carried out with Desjardins Group
is found in note 17 to the consolidatedfinancial statements. Transactions with privatesector entities accounted for only 6% of theportfolio.
Table XIV OFF-BALANCE SHEET CREDIT INSTRUMENTS AND DERIVATIVES - Notional Amounts
As at December 31(in millions of dollars)
2006 2005
Members and Members and other entities other entities
included in the included in the scope of scope of
consolidation consolidationof Desjardins of Desjardins
Group Other Total Group Other TotalCredit instrumentsGuarantees and standby letters of credit $ 57 $ 551 $ 608 $ 111 $ 333 $ 444Commitments to extend credit
Over one year — 1,373 1,373 84 1,675 1,759One year or less and conditional 2,682 4,930 7,612 3,206 4,059 7,265
Commitments to purchase assets — 13 13 — 7 7
2,739 6,867 9,606 3,401 6,074 9,475
DerivativesInterest rate contracts 28,592 72,039 100,631 31,074 54,899 85,973Foreign exchange contracts 1,181 11,196 12,377 970 7,476 8,446Other contracts 2,713 2,380 5,093 2,104 1,995 4,099
32,486 85,615 118,101 34,148 64,370 98,518
TOTAL $ 35,225 $ 92,482 $127,707 $ 37,549 $ 70,444 $ 107,993
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16 % Demand deposits
19 % Short-term deposits - Canada
8 % Short-term deposits - US & Euro
3 % Medium-term deposits - Canada
34 % Medium-term deposits - Europe & debenture
13 % Entities included in the scope of consolidationof Desjardins Group
DEPOSITS AND DEBENTUREBY PROGRAMAs at December 31, 2006
CHART II
1. 50 % Canadian dollars
2. 17 % U.S. dollars
3. 33 % Euros
DEPOSITS AND DEBENTURE BY CURRENCYAs at December 31, 2006
CHART I
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3.4.
5.
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1. 63 % Banks
2. 28 % Members and other entities includedin the scope of consolidationof Desjardins Group
3. 6 % Private sector
4. 3 % Government
DERIVATIVE NOTIONAL AMOUNTSBy counterparty
CHART IV
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2.
3. 4.
1. 36 % Within 1 year
2. 34 % 1 to 3 years
3. 25 % 3 to 5 years
4. 5 % Over 5 years
DERIVATIVE NOTIONAL AMOUNTSBy maturity
CHART V
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48 MANAGEMENT’S DISCUSSION AND ANALYSIS RISK MANAGEMENT
Chart V shows the maturity profile of thederivative portfolio. As a general rule, themarket risk associated with short-term financialinstruments is lower than with long-term ones.As measured by notional amounts, 70% ofthese derivatives have remaining terms of lessthan three years and more than half of thesewill mature within one year. Also important tomention is that close to 81% of the forwardexchange contracts have a remaining term ofless than three months.
OPERATIONAL RISKMANAGEMENT
Operational risk is defined as the risk ofinadequacy or failure attributable to processes,people, internal systems or external events andresulting in losses, failure to achieve objectivesor a negative impact on reputation.
Operational risk is the potential risk that Caisse centrale may incur losses arising fromfraud, damage to tangible assets, acts inviolation of legislation, lawsuits, system failures,problems in transaction processing or processmanagement as well as disruptions due toexternal factors.
Operational risk is inherent to all of Caisse centrale'sbusiness activities and can never be completelyeliminated. However, Caisse centrale endeavoursto minimize operational risk through its internalcontrol systems which provide for segregationof duties, a disciplined approach to decision-making and delegation of authority, thedevelopment of appropriate policies, methodsand infrastructures, and duly confirmedrecording of transaction-related information.Internal controls also involve risk monitoring,financial reporting and insurance coveragemeasures. In addition, Caisse centrale has back-up capabilities and a business resumptionplan to ensure ongoing service delivery underadverse conditions.
Effective management of operational riskdepends as well on the commitment,competence and ability of Caisse centrale’spersonnel. The internal controls and systems in place are examined from time to time byDesjardins Group internal auditors.
Striving to implement sound and prudentoperational risk management tools andmethods, Caisse centrale has pursued its work within Desjardins Group’s joint project,including the organization of an operationalrisk incident database and preparation of anongoing operational risk and controls self-assessment program.
REGULATORY COMPLIANCE
A new sector in charge of specifically ensuringregulatory compliance has been created. Thework undertaken by this sector aims to ensurecompliance with regulatory requirementsconcerning financial reporting. A DisclosureCommittee was set up to validate theevaluation program of controls over financialreporting. Moreover, Caisse centrale is involvedin the development of the Desjardins Groupmaster program for regulatory compliancemanagement.
Through its committees and the completion ofspecific projects, Caisse centrale ensures that itstechnology environment evolves in a controlledand secure manner. Consequently, strategicplanning with respect to the implementation of these projects, disaster recovery, systemsturdiness, security, management of humanresources expertise, and proper control of itsoperations are considerations to which Caissecentrale devotes considerable effort in order tocounter the specific related operational risks.
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16 % Demand deposits
19 % Short-term deposits - Canada
8 % Short-term deposits - US & Euro
3 % Medium-term deposits - Canada
34 % Medium-term deposits - Europe & debenture
13 % Entities included in the scope of consolidationof Desjardins Group
DEPOSITS AND DEBENTUREBY PROGRAMAs at December 31, 2006
CHART II
1. 50 % Canadian dollars
2. 17 % U.S. dollars
3. 33 % Euros
DEPOSITS AND DEBENTURE BY CURRENCYAs at December 31, 2006
CHART I
1.
2.
3.
1.
2.
3.4.
5.
6.
1. 63 % Banks
2. 28 % Members and other entities includedin the scope of consolidationof Desjardins Group
3. 6 % Private sector
4. 3 % Government
DERIVATIVE NOTIONAL AMOUNTSBy counterparty
CHART IV
1.
2.
3. 4.
1. 36 % Within 1 year
2. 34 % 1 to 3 years
3. 25 % 3 to 5 years
4. 5 % Over 5 years
DERIVATIVE NOTIONAL AMOUNTSBy maturity
CHART V
1.
2.
3.
4.
CHART III 2006 VALUE-AT-RISK
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
$ millions
january 2006 june 2006 december 2006
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49CAPITAL MANAGEMENT MANAGEMENT’S DISCUSSION AND ANALYSIS
CAPITALMANAGEMENT
Capital is an important factor for assessing thesecurity and soundness of Caisse centrale inrelation to all the risks associated with itsactivities. In recent years, regulators and ratingagencies have paid a great deal of attention to financial institutions' capital levels.
REGULATORY CAPITAL
The capital adequacy of Caisse centrale isregulated by the standards of the Fédérationdes caisses Desjardins du Québec, which wereapproved by the Autorité des marchésfinanciers. These standards are based on the regulatory requirements of the BaselCommittee on Banking Supervision of the Bank for International Settlements (“BIS”),which oversees the capital adequacy offinancial institutions operating on internationalmarkets. In this way, Caisse centrale candetermine where it stands relative to otherfinancial institutions also involved oninternational markets.
Total regulatory capital, which constitutescapital, differs from the capital disclosed on the balance sheet. It comprises two classes: Tier I capital and supplementary or Tier IIcapital. Tier I capital includes more permanentcapital items than Tier II capital. It consists ofmembers’ equity (which includes capital stock,retained earnings and the general reserve). Tier II or supplementary capital essentiallyconsists of subordinated debentures and theeligible general provision for credit losses. Itshould be noted that debentures must beamortized on a straight-line basis over the five years preceding their maturity.
Consequently, as at December 31, 2006,capital, as defined by the standards of theFédération des caisses Desjardins du Québec,totalled $1.1 billion compared to $849 millionat the end of fiscal 2005.
RISK-WEIGHTED ASSETS, OFF-BALANCESHEET CREDIT INSTRUMENTS ANDDERIVATIVES
The standards of the Fédération des caissesDesjardins du Québec require that “risk-weighted balances” be calculated for assets,off-balance sheet credit instruments andderivatives, and that aggregate values beweighted using a common definition of capital.
Off-balance sheet credit instruments andderivatives are converted to “credit riskequivalents”, as shown in Table XV. For creditinstruments such as guarantees, standby lettersof credit and commitments to extend credit,the “credit risk equivalent” is determined bymultiplying the principal or nominal amount byappropriate “credit conversion factors”, whichcan range from 0% to 100% depending on thenature of the instrument and the original termto maturity. The “credit risk equivalent” forforeign exchange, interest rate and currencycontracts takes into account the replacementcost of contracts with a positive value and thepotential credit exposure on the contracts,calculated based on their residual term to maturity.
The “credit risk equivalent” for off-balancesheet credit instruments and derivatives,together with on-balance sheet assets, are then multiplied by appropriate “risk weights”to determine risk-weighted balances. The riskweights depend on the relative credit risk ofthe counterparty and vary from 0% for claimson or guaranteed by the Canadian or provincialgovernments to 100% for claims on orguaranteed by the private sector.
As shown in Table XV, Caisse centrale’s risk-weighted assets, off-balance sheet creditinstruments and derivatives totalled $7.9 billionas at December 31, 2006 compared to $6.1 billion as at December 31, 2005.
CAPITAL RATIO
Section 46 of the Act respecting the MouvementDesjardins states that Caisse centrale mustmaintain an adequate capital base consistentwith sound and prudent management, inaccordance with the standards of theFédération des caisses Desjardins du Québec(and approved by the Autorité des marchésfinanciers).
According to these standards, Caisse centralemust at all times maintain capital in accordancewith the following ratios:
a) its total capital must be greater than or equal to 5% of its total assets;
b) its total capital must be greater than or equal to 8% of its risk-weighted assets, of which at least one half is Tier I capital.
Furthermore, the member federations formallyundertook to maintain, in proportion to theirrespective holdings, Caisse centrale’s totalcapital at a minimum level of (i) 5.5% of itstotal assets, or if higher, at (ii) 8.5% of its risk-weighted assets, as determined inaccordance with the established standards.
In 2006, two capital injections were made by members totalling $221 million, andconsequently, 221,000 Class A capital shareswere issued.
The capital stock issued and outstanding of Caisse centrale is, therefore, composed of 887,203 Class A capital shares and 600 qualifying shares outstanding as at December 31, 2006.
As at December 31, 2006, the capital/assetratio was 6.35% compared to 5.51% in 2005.Tier I capital and total capital ratios determinedin accordance with BIS rules stood at 11.5%and 13.9%, respectively, compared to 11.3%and 13.9%, respectively, a year earlier.
It should be noted, however, that both the Tier I capital ratio and total capital ratios ofCaisse centrale determined in accordance withBIS rules exceed the 7% and 10% benchmarkdetermined by the Office of the Superintendentof Financial Institutions Canada to becharacteristic of a financial institution with a sound capitalization.
OUTLOOK
Caisse centrale expects to remain very highlycapitalized throughout 2007.
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50 MANAGEMENT’S DISCUSSION AND ANALYSIS CAPITAL MANAGEMENT
Table XV RISK-WEIGHTED ASSETS, OFF-BALANCE CREDIT INSTRUMENTS AND DERIVATIVES
As at December 31Balance Risk-weighted
ASSETS sheet Risk- balance(in thousands of dollars) amount weigth 2006 2005
Cash and deposits with financial institutions $ 167,871 0-100 % $ 13,668 $ 4,094Securities issued or guaranteed by Canada, provinces and municipal, school or public corporations in Canada 1,136,523 0-20 % 7,229 6,432
Securities issued or guaranteed by US public administrations 23,661 20 % 4,732 4,302Securities issued by banks 1,206,921 20 % 241,384 289,272Other securities 1,437,916 100 % 1,437,916 493,146Loans issued or guaranteed by Canada, provinces, municipalities, school boards and public agencies 1,526,534 0-20 % 300,215 295,147Loans to members and other entities included in the scope of consolidation of Desjardins Group 6,587,641 20-100 % 1,545,994 1,538,658
Other loans 2,809,995 0-100 % 2,533,035 2,097,302Other assets 2,700,155 0-100 % 607,062 313,361
$ 17,597,217 $ 6,691,235 $ 5,041,714
OFF-BALANCE CREDIT INSTRUMENTS AND DERIVATIVES
Credit Risk-weighted Notional conversion Credit risk Risk- balance
(in thousands of dollars) amount factor équivalent weight 2006 2005
Off-balance credit instrumentsGuarantees and standby letters of credit $ 608,241 0-100 % $ 608,241 20-100 % $ 409,479 $ 246,400Commitments to extend credit
(Original term to maturity)Over one year 1,373,274 50 % 686,637 0-100 % 656,182 690,574One year or less and conditional 7,611,957 0 % — 0 % — —
Commitments to purchase assets 12,076 100 % 12,076 0 % — —DerivativesInterest rate contracts 100,630,638 (1) 644,571 20-50 % 125,148 137,473Foreign exchange contracts 12,377,325 (1) 730,055 20-50 % 160,459 76,773Other contracts 5,093,349 (1) 758,628 20-50 % 232,061 189,147
$ 127,706,860 $ 3,440,208 $ 1,583,329 $1,340,367Less impact of master netting agreements (340,029) (288,937)
$ 1,243,300 $1,051,430
TOTAL RISK-WEIGHTED ASSETS, OFF-BALANCE CREDIT INSTRUMENTS AND DERIVATIVES $ 7,934,535 $6 093,144
(1) Derivatives are converted to their "credit risk equivalent" by adding the total replacement cost (at market value) of all outstanding contracts with apositive value and an amount for potential credit exposure based on the total contract amounts broken down by remaining term to maturity, as follows:
Remaining term to maturity Foreign exchange Interest rate Other contracts contracts contracts
Within 1 year 1.0 % 0 % 6 %Over 1 year to 5 years 5.0 % 0.5 % 8 %Over 5 years 7.5 % 1.5 % 10 %
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51FIVE-YEAR CONSOLIDATED BALANCE SHEETS MANAGEMENT’S DISCUSSION AND ANALYSIS
FIVE-YEAR CONSOLIDATED BALANCE SHEETS
As at December 31(in thousands of dollars)
2006 20051 20041 20031 20021
AssetsCash and deposits with Bank of Canada $ 167,871 $ 150,859 $ 124,307 $ 112,509 $ 67,202Securities 3,805,021 3,348,898 2,843,203 3,618,539 3,868,115Loans
Securities purchased under resale agreements 16,963 — 95,625 14,919 6,222Day, call and short-term loans to investment dealers and brokers 234,000 205,000 446,000 218,000 158,739
MembersFédération 5,644,679 5,572,070 5,443,248 3,719,748 2,054,660Other 70,000 73,049 43,863 — —
Other entities included in the scope of consolidation of Desjardins Group 872,962 955,196 960,788 1,032,009 291,023
Public and parapublic sectors 1,526,534 1,476,809 1,454,697 1,522,989 917,921Loans purchased from Desjardins Group 78,242 4,891 132 134,319 205,967Private sector 2,568,685 2,071,230 1,803,444 1,570,584 1,531,872Allowance for credit losses (87,895) (72,123) (61,074) (90,390) (78,922)
10,924,170 10,286,122 10,186,723 8,122,178 5,087,482
Assets related to derivatives 1,162,496 887,756 1,270,343 1,070,619 1,213,574Customers’ liability under acceptances 1,247,000 848,000 148,900 450,300 349,300Other 290,659 235,818 196,870 144,189 213,288
Total assets $ 17,597,217 $15,757,453 $ 14,770,346 $13,518,334 $10,798,961
Liabilities and members’ equityDeposits
Payable on demand $ 2,121,655 $ 896,726 $ 1,055,131 $ 787,512 $ 698,940Payable on a fixed date 11,308,966 11,052,217 10,187,223 9,334,350 7,089,162
13,430,621 11,948,943 11,242,354 10,121,862 7,788,102
Liabilities related to derivatives 1,125,021 1,287,922 1,290,935 1,211,171 1,289,151Acceptances 1,247,000 848,000 148,900 450,300 349,300Other 766,467 879,458 1,277,238 924,039 714,354Subordinated debenture 117,103 105,035 123,868 123,911 125,806Members’ equity
Capital stock 887,206 666,206 666,206 666,206 511,403Retained earnings 2,954 1,044 — — —General reserve 20,845 20,845 20,845 20,845 20,845
911,005 688,095 687,051 687,051 532,248Total liabilities and members’ equity $ 17,597,217 $15,757,453 $ 14,770,346 $13,518,334 $10,798,961
1 Reclassified to conform to current year’s presentation.
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52 MANAGEMENT’S DISCUSSION AND ANALYSIS FIVE-YEAR CONSOLIDATED STATEMENTS OF INCOME
FIVE-YEAR CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31(in thousands of dollars)
2006 2005 2004 2003 2002
Interest incomeLoans $ 513,007 $ 359,216 $ 264,359 $ 208,749 $ 187,318Securities 141,448 104,786 118,165 136,194 159,849
654,455 464,002 382,524 344,943 347,167Interest expense 535,775 361,638 277,573 250,289 254,725
Net interest income 118,680 102,364 104,951 94,654 92,442Other income 70,083 59,261 47,743 36,394 31,127
Gross income 188,763 161,625 152,694 131,048 123,569Provision for credit losses 16,797 15,150 15,194 16,425 21,146
171,966 146,475 137,500 114,623 102,423
Non-interest expenseSalaries and benefits 35,146 28,151 26,391 22,354 17,267Premises, equipment and furniture, including amortization 18,119 15,779 12,850 11,831 10,571Other 19,994 15,923 15,453 13,321 12,229
73,259 59,853 54,694 47,506 40,067
Net income before other payments to the Desjardins network and income taxes 98,707 86,622 82,806 67,117 62,356Other payments to the Desjardins network 27,944 24,392 23,907 17,998 16,238
Net income before income taxes 70,763 62,230 58,899 49,119 46,118Income taxes 16,289 13,712 14,797 9,313 10,790
Net income $ 54,474 $ 48,518 $ 44,102 $ 39,806 $ 35,328
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53QUARTERLY FINANCIAL INFORMATION MANAGEMENT’S DISCUSSION AND ANALYSIS
QUARTERLY FINANCIAL INFORMATION
(in thousands of dollars) 2006 2005(Quarter-end) Q4 Q31 Q21 Q11 Q41 Q31 Q21 Q11
BALANCE SHEETASSETSCash and deposits with financial institutions $ 167,871 $ 286,792 $ 296,875 $ 180,475 $ 150,859 $ 205,450 $ 68,880 $ 114,377
Securities 3,805,021 3,402,873 3,291,592 2,758,077 3,348,898 2,456,078 2,387,453 2,613,438Loans 10,924,170 9,392,410 9,542,112 10,726,704 10,286,122 9,250,426 9,259,610 10,041,937
Assets related to derivatives 1,162,496 927,647 1,085,209 894,615 887,756 1,272,338 1,362,906 1,058,439Customers’ liability under acceptances 1,247,000 2,155,600 1,273,142 397,200 848,000 550,700 511,000 275,100
Other 290,659 251,107 372,704 268,431 235,818 169,736 206,673 182,820
$ 17,597,217 $ 16,416,429 15,861,634 $ 15,225,502 $ 15,757,453 $13,904,728 $13,796,522 $14,286,111
LIABILITIES AND MEMBERS’ EQUITYDeposits $ 13,430,621 $ 11,040,323 $ 11,574,032 $ 11,677,931 $ 11,948,943 9,925,943 $ 9,523,462 $11,171,720Liabilities related to derivatives 1,125,021 1,211,713 1,394,007 1,209,475 1,287,922 1,597,512 1,567,045 1,180,223
Acceptances 1,247,000 2,155,600 1,273,142 397,200 848,000 550,700 511,000 275,100Obligations related to securities sold short 16,954 94,999 33,155 15,323 78,643 14,312 — 9,773Commitment under repurchase agreements — 581,284 279,974 617,311 244,658 263,405 512,629 137,722Other 749,513 414,118 388,603 511,694 556,157 758,713 882,553 705,191Subordinated debenture 117,103 107,729 108,439 107,831 105,035 106,523 112,782 119,331Members’ equity 911,005 810,663 810,282 688,737 688,095 687,620 687,051 687,051
$ 17,597,217 $ 16,416,429 $ 15,861,634 $15,225,502 $ 15,757,453 $13,904,728 $13,796,522 $14,286,111
(Quarter)STATEMENTS OF INCOMENet interest income $ 33,392 $ 32,029 $ 30,215 $ 23,044 $ 23,223 $ 26,071 $ 27,685 $ 25,385Other income 11,454 21,087 17,668 19,874 18,022 14,217 14,020 13,002Provision for credit losses (5,440) (3,818) (3,760) (3,779) (3,758) (3,706) (3,835) (3,851)Non-interest expense (24,084) (17,197) (17,160) (14,818) (16,276) (15,243) (14,667) (13,667)
Net income before other payments to the Desjardins network and income taxes 15,322 32,101 26,963 24,321 21,211 21,339 23,203 20,869Other payments to the Desjardins network (6,963) (7,064) (7,020) (6,897) (5,931) (5,865) (6,257) (6,339)
Net income before income taxes 8,359 25,037 19,943 17,424 15,280 15,474 16,946 14,530Income taxes (1,620) (5,930) (4,531) (4,208) (2,093) (3,850) (4,105) (3,664)
Net income $ 6,739 $ 19,107 $ 15,412 $ 13,216 $ 13,187 $ 11,624 $ 12,841 $ 10,866
1 Reclassified to conform to current year’s presentation.
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54 2006 CONSOLIDATED FINANCIAL STATEMENTS
AUDIT COMMISSION’S ANNUAL REPORT
The role of the Audit Commission (the “Commission”) is to support the Board of Directors in its oversight function. Its mandate consists primarily ofanalyzing the financial statements, their presentation and the quality of the accounting principles used, management of financial reporting risks, internalcontrol systems, internal and external audit processes, the procedures applied during such audits and regulatory compliance management.
To this end, the Commission examines the annual and quarterly financial statements, related press releases, the annual Management’s Discussion andAnalysis, the Annual Information Form and the prospectus. Furthermore, it reviews various reports, including reports on regulatory ratios, capitalizationand the quarterly valuation of the off-balance sheet derivatives portfolio.
The Commission ensures that Management has developed and implemented an effective internal control system for financial reporting, assetsafeguarding, fraud detection and regulatory compliance.
It further ensures that Management has set up management systems for the main risks that could affect the financial results of the entity.
The external auditor reports directly to the Audit Commission. In order to discharge its responsibilities in this area, the Commission ensures and maintainsthe independence of the external auditor by authorizing all non audit-related services, by recommending its appointment or continuance, by fixing andrecommending its remuneration and by conducting an annual review of its performance. In addition, it supervises the work of the external auditors,examines their proposal, their mandate, their annual audit plan, their reports, their letter to Management and Management’s comments on this letter.Desjardins Group adopted a policy on the rules for awarding contracts for related services regarding (a) services that can or cannot be rendered by theexternal auditor, (b) the governance procedure to be followed before awarding mandates, and (c) the responsibilities of the main persons involved.Consequently, it receives a quarterly report on the contracts awarded to external auditors by Caisse centrale and Desjardins Group.
With regard to relations with the Autorité des marchés financiers, the Commission reviews and follows up on the supervisory report issued by the agency,and it also reviews the quarterly financial reports submitted to it.
The Commission ensures that the independence of the internal audit function of Desjardins Group is safeguarded. It examines the annual internal auditplan for Caisse centrale, as well as the responsibilities, performance, objectivity and staffing of this team. It reviews the summary reports on the internalaudits performed and, where necessary, ensures their follow-up. For such purpose, it meets with the Internal Auditor of Desjardins Group to discuss anyimportant matters submitted to Management.
The Commission meets privately with the external auditors, Management, the Chief Internal Auditor of Desjardins Group and representatives from the Autorité des marchés financiers. Every quarter, it submits a report to the Board of Directors and makes recommendations, if necessary.
Finally, in compliance with sound corporate governance practices, the Commission annually assesses the effectiveness and efficiency with which it has performed the tasks set out in its charter.
The Commission is composed of five independent directors. With the exception of a member who acts as an instructor at training workshops forDesjardins staff and officers, none of the directors receives remuneration from Desjardins Group, directly or indirectly, other than for the services theyprovide as members of the Board of Directors of Desjardins Group and its committees.
All the members of the Commission are sufficiently financially literate to read and interpret the financial statements of a financial institution, according to the criteria set out in the Commission’s charter.
The Commission met seven times during fiscal 2006. During the year, Jean-Guy Bureau and Marcel Lauzon resigned from the Commission, and ThomasBlais and Serge Tourangeau joined it. As at December 31, the members of the Commission were Andrée Lafortune, FCA, Pierre Leblanc, FCA, ThomasBlais, Serge Tourangeau and Benoît Turcotte.
Andrée Lafortune, FCAChair of the Audit Commission
Montreal, QuebecFebruary 16, 2007
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552006 CONSOLIDATED FINANCIAL STATEMENTS
MANAGEMENT’S REPORT
Management is responsible for preparing the consolidated financial statements and related information appearing in this Annual Report and for ensuringtheir reliability and accuracy. These consolidated financial statements have been prepared in accordance with Canadian generally accepted accountingprinciples. When required to make estimates, management did so to the best of its knowledge.
The accounting system of Caisse centrale Desjardins (“Caisse centrale”) and related internal controls and procedures are designed to ensure the reliabilityof financial information and, to a reasonable degree, safeguard assets against loss or unauthorized use. These procedures include standards in hiring andtraining employees, an organizational structure with clearly defined lines of responsibility, written and updated policies and procedures, planning andfollow-up of projects, budget controls by cost centre and divisional performance accountability. The internal control systems are supplemented by regularindependent reviews of Caisse centrale's major business segments. In addition, in the course of his duties, the Internal Auditor of Desjardins Group mayconfer at any time with the Board of Directors' Audit Commission. Composed entirely of directors who are neither officers nor employees of Caissecentrale, this Commission ensures that management has fulfilled its responsibilities with respect to financial reporting and the application of internalcontrols. During the year ended December 31, 2006, the Audit Commission met seven times. In addition, the Board of Ethics, elected by the generalmeeting, ensures compliance with rules of professional conduct regarding, among other matters, conflicts of interest and related or restricted partytransactions. This Board met eight times in 2006.
The Autorité des marchés financiers examines the affairs of Caisse centrale annually to ensure that the provisions of its constituent legislation, particularlywith respect to the protection of depositors, are duly observed and that Caisse centrale is in sound financial condition.
The external auditors appointed at the general meeting of members, PricewaterhouseCoopers LLP, have the responsibility of auditing the consolidatedfinancial statements in accordance with Canadian generally accepted auditing standards and of expressing their opinion thereon. Their report follows.They may, at any time, confer with the Audit Commission on all matters concerning the nature and execution of their mandate, particularly with respectto the accuracy of financial information provided by Caisse centrale and the reliability of its internal control systems.
Alban D’Amours Jean-Guy LangelierChairman of the Board and President and Chief Operating OfficerChief Executive Officer of Caisse centrale Desjardins and
Chief of the Treasury of Desjardins Group
Montreal, QuebecFebruary 27, 2007
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AUDITORS’ REPORT
To the Members of Caisse centrale Desjardins:
We have audited the consolidated balance sheets of Caisse centrale Desjardins as at December 31, 2006 and 2005 and the consolidated statements of income, members’ equity and cash flows for the years then ended. These financial statements are the responsibility of Caisse centrale Desjardins'smanagement. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of Caisse centrale Desjardins as at December 31, 2006 and 2005 and the results of its operations and its cash flows for the years then ended in accordance with Canadian generallyaccepted accounting principles.
Chartered Accountants
Montreal, QuebecFebruary 27, 2007
56 2006 CONSOLIDATED FINANCIAL STATEMENTS
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572006 CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETSAs at December 31(in thousands of dollars)
2006 2005ASSETSCash and deposits with financial institutions $ 167,871 $ 150,859Securities (notes 3 and 16)
Investment account 2,963,001 2,687,402Trading account 842,020 661,496
3,805,021 3,348,898
Loans (note 4) 10,924,170 10,286,122Other
Assets related to derivatives (note 13) 1,162,496 887,756Customers’ liability under acceptances 1,247,000 848,000Other assets (note 6) 290,659 235,818
2,700,155 1,971,574
$17,597,217 $15,757,453
LIABILITIES AND MEMBERS’ EQUITYDeposits (note 7)
Payable on demand $ 2,121,655 $ 896,726Payable on a fixed date 11,308,966 11,052,217
13,430,621 11,948,943
Other Liabilities related to derivatives (note 13) 1,125,021 1,287,922Acceptances 1,247,000 848,000Obligations related to securities sold short 16,954 78,643Commitments under repurchase agreements — 244,658Other liabilities (note 8) 749,513 556,157
3,138,488 3,015,380
Subordinated debenture (note 9) 117,103 105,035Members’ equity 911,005 688,095
$ 17,597,217 $15,757,453
The accompanying notes are an integral part of the consolidated financial statements.
On behalf of the Board,
Alban D’Amours Pierre TardifChairman of the Board and Vice-Chair of the BoardChief Executive Officer
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58 2006 CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOMEFor the years ended December 31(in thousands of dollars)
2006 2005Interest income
Loans $ 509,045 $ 359,216Securities 145,410 104,786
654,455 464,002
Interest expenseDeposits 529,795 355,352Subordinated debenture 5,980 6,286
535,775 361,638
Net interest income 118,680 102,364
Other incomeService charges on chequing and deposit accounts 14,649 13,724Foreign exchange revenue 28,878 23,242Trading activities 4,384 (639)Investment activities 3,229 8,196Fees on Desjardins Acceptances 9,751 8,120Credit fees 3,685 3,019Other 5,507 3,599
70,083 59,261
Gross income 188,763 161,625Provision for credit losses (note 4) 16,797 15,150
171,966 146,475
Non-interest expenseSalaries and benefits 35,146 28,151Premises, equipment and furniture, including amortization 18,119 15,779Other 19,994 15,923
73,259 59,853
Net income before other payments to the Desjardins network and income taxes 98,707 86,622Other payments to the Desjardins network 27,944 24,392
Net income before income taxes 70,763 62,230Income taxes (note 11) 16,289 13,712
Net income $ 54,474 $ 48,518
The accompanying notes are an integral part of the consolidated financial statements.
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592006 CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF MEMBERS’ EQUITYFor the years ended December 31(in thousands of dollars)
2006 2005Capital stock (note 10)Balance at beginning of year $ 666,206 $ 666,206Issuance of Class A capital shares 221,000 —
Balance at end of year $ 887,206 $ 666,206
Retained earningsBalance at beginning of year $ 1,044 $ —Net income 54,474 48,518Remuneration of capital stock (68,168) (60,848)Recovery of income taxes related to the remuneration of capital stock (note 11) 15,604 13,374
Balance at end of year $ 2,954 $ 1,044
General reserveBalance at beginning and end of year $ 20,845 $ 20,845
Total members’ equity $ 911,005 $ 688,095
The accompanying notes are an integral part of the consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CASH FLOWSFor the years ended December 31(in thousands of dollars)
2006 2005Cash flows from operating activitiesNet income $ 54,474 $ 48,518Adjustments to determine cash flows from operating activities:
Amortization of premises and equipment and intangible assets 2,975 2,519Provision for credit losses 16,797 15,150Gain on sale of investment account securities (14,904) (3,823)Decrease (increase) in future income taxes 2,309 (3,796)Net increase in trading account securities (180,523) (12,889)Decrease in accrued interest receivable 13,797 2,436(Decrease) increase in accrued interest payable (9,501) 3,027Decrease in current income taxes (5,583) (766)(Increase) decrease in unrealized gains and amounts receivable on derivatives (283,871) 339,505Decrease in unrealized losses and amounts payable on derivatives (162,901) (3,013)Other items, net 256,202 (348,653)
(310,729) 38,215
Cash flows from financing activitiesNet increase in deposits 1,481,678 706,589Net decrease in obligations related to securities sold short (61,689) (16,982)Net decrease in commitments under repurchase agreements (244,658) (31,046)Issuance of capital shares 221,000 —Remuneration of capital stock paid (121,000) (66,813)
1,275,331 591,748
Cash flows from investing activitiesNet increase in investment account securities1 (260,695) (488,983)Net increase in loans (564,531) (205,413)Purchase of mortgage loans from Desjardins Group (1,358,492) (128,437)Proceeds from securitization of mortgage loans 1,248,064 121,355Net (increase) decrease in securities purchased under resale agreements (16,963) 95,625Net additions to premises and equipment and intangible assets (13,064) (11,709)
(965,681) (617,562)
Net change in cash and cash equivalents (1,079) 12,401Cash and cash equivalents at beginning of year 107,461 95,060
Cash and cash equivalents at end of year $ 106,382 $ 107,461
Represented by:Cash and deposits with financial institutions $ 167,871 $ 150,859Cheques and other items in transit (61,489) (43,398)
$ 106,382 $ 107,461
Additional informationInterest paid during the year $ 545,277 $ 358,611Income taxes paid during the year 6,268 4,899
The accompanying notes are an integral part of the consolidated financial statements.1 The purchases, sales and maturities of investment account securities amounted respectively to $6,877,185, $1,544,408 and $5,093,815 for the year ended December 31, 2006.
2006 CONSOLIDATED FINANCIAL STATEMENTS
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612006 CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSDecember 31, 2006 and 2005(All tabular figures are in thousands of dollars, unless otherwise indicated.)
Note 1
INCORPORATION AND MANDATE
Caisse centrale Desjardins du Québec (“Caisse centrale”), created on June 22, 1979, is a financial services cooperative governed by the Actrespecting the Mouvement Desjardins [2000, S.Q., c. 77] (the “ConstituentLegislation”) and by the Act respecting financial services cooperatives(Quebec). Pursuant to its Constituent Legislation, Caisse centrale may also identify itself under the name of “Caisse centrale Desjardins.“
Caisse centrale is a cooperative institution which offers financial services to Desjardins Group, governments, public and parapublic sectorinstitutions, medium-sized businesses and large corporations. It serves the needs of the Fédération des caisses Desjardins du Québec (the“Fédération”), the Desjardins caisses (the “member caisses”), and otherDesjardins Group entities (“Desjardins Group”). Caisse centrale’s mandateis to provide institutional funding for the Desjardins network and to act as financial agent, notably by supplying interbank exchange services,including clearing house settlements. Caisse centrale’s activities on theCanadian and international markets complement those of other DesjardinsGroup entities.
Note 2
SIGNIFICANT ACCOUNTINGPOLICIES
The consolidated financial statements of Caisse centrale are prepared inaccordance with section 163 of the Act respecting financial servicescooperatives which requires that, unless otherwise specified by the Autoritédes marchés financiers, consolidated financial statements be prepared inaccordance with Canadian generally accepted accounting principles(“GAAP”). There is no significant difference between Canadian GAAP and the accounting rules prescribed by the Autorité des marchés financiers. Thepreparation of consolidated financial statements in conformity with theseprinciples requires management to make estimates and assumptions. Someestimates, including those for the allowance for credit losses, the fair value of financial instruments and the accounting for securitizations, litigation,pension plans and income taxes, require that management make complex,subjective judgments which could affect the amounts reported in theconsolidated financial statements and the notes thereto. Consequently, actual results may differ from those estimates.
Significant accounting policies used in the preparation of these consolidatedfinancial statements are summarized below.
CONSOLIDATION
The consolidated financial statements include the assets and liabilities and results of operations of Caisse centrale and those of its wholly ownedAmerican subsidiaries, Desjardins Bank, N.A. and Desjardins CommercialLending U.S.A. Corp., after elimination of intercompany transactions and balances.
SECURITIES
Securities include investment account and trading account securities.
Investment account securities
Investment account securities are purchased with the primary intent ofholding them until maturity or until market conditions are more favourablefor other types of securities. Equity securities are stated at cost and debtsecurities, at amortized cost. Premiums and discounts are amortized overthe terms of the related securities on a straight-line basis.
Realized gains and losses on investment account securities, which arecalculated using average cost, as well as write-downs to reflect a decline in value that is other than temporary are recorded under “Investmentactivities” in “Other income.” Dividend and interest income, includingamortization of premiums and discounts on investment account securities,is recorded in consolidated income under “Interest income.”
Trading account securities
Trading account securities, which are purchased for resale over a shortperiod of time, are stated at fair value, which is determined based onquoted market prices. When the price of a security is not available, the fair value is estimated using the quoted market price of similar securities.
Realized and unrealized gains and losses on trading account securities are recorded in consolidated income under “Trading activities” in “Otherincome.” Dividend and interest income is recorded in consolidated incomeunder “Interest income.”
LOANS
Loans are stated at cost, net of the allowance for credit losses, discountsand unamortized loan fees. Where deemed appropriate, Caisse centraleobtains security in the form of cash, securities, immovable property,accounts receivable, guarantees, inventories or other assets.
Acting as an intermediary for Desjardins Group entities, Caisse centralebuys and resells mortgage, farm and other loans. These loans are recordedat fair value as “Loans purchased from Desjardins Group.”
Interest income is recorded on an accrual basis, except when the loan is considered to be impaired.
Impaired loans
A loan is considered impaired when: (a) there is reason to believe that aportion of the principal or interest cannot be collected, or (b) the interestor principal is contractually 90 days in arrears, except when there isreasonable assurance of collecting the principal or interest. The interest,previously accrued but not received on such a loan, is reversed to interestincome on loans in the current year. No portion of cash received on a loansubsequent to its classification as impaired is recorded as income beforeany prior write-off has been recovered or any specific provision has beenreversed and it is deemed that the loan principal is fully collectible.
An impaired loan is recorded at its estimated realizable value, measured by discounting the expected future cash flows at the interest rate inherentin the loan. When the amount or timing of future cash flows cannot beestimated with reasonable reliability, the loan is recorded at either the fairvalue of the underlying security or the market price for the loan. Anychange in the estimated realizable amount is presented as a charge orcredit for loan impairment through the allowance for credit losses. An
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impaired loan is once again recorded under the accrual method when theprincipal and interest payments are current and there is no longer anyreasonable doubt that the impaired loan will be recovered.
Loan fees
Loan origination, restructuring and renegotiation fees are considered as adjustments to loan yield and are deferred and amortized to “Interestincome” over the estimated term of such loans. In the likelihood that a loan will result, commitment and standby fees are also included in“Interest income” over the expected term. Otherwise, fees are recorded as “Other income” during the commitment or standby period. Loansyndication fees are presented under “Other income” when thesyndication agreement is signed, unless the yield of any loan retained byCaisse centrale is less than one of the other comparable lenders involvedin the financing. In such cases, an appropriate portion of the fees isdeferred and amortized to interest income over the term of the loan.
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is maintained at an amount consideredsufficient to absorb the estimated losses related to the loan portfolio, off-balance sheet commitments, acceptances and derivative instruments.This allowance is increased by the provision for credit losses charged toconsolidated income and reduced by write-offs net of recoveries. Thisallowance comprises specific provisions and a general provision for creditlosses. Management conducts ongoing credit risk assessments andestablishes specific provisions when impaired loans are identified.
Specific provisions
Specific provisions are established on an individual basis for all identifiedimpaired loans, reducing their carrying value to their estimated realizablevalue.
General provision
The general provision for credit losses reflects management’s estimate of probable portfolio losses that are not covered by specific provisions.The general provision for credit losses does not represent future losses nor replace specific provisions. It takes into account economic and market conditions that affect the main lending activities, recent credit loss experience, and trends in credit quality and concentration. Thisprovision also reflects model and estimation risks, which are reviewed and revised where conditions indicate the initial assumptions will differfrom actual results.
SECURITIZATION OF MORTGAGES
As part of Desjardins Group’s capital and liquidity management strategy,Caisse centrale participates in the National Housing Act (“NHA”)Mortgage-Backed Securities Program. Under this program, Caisse centraleconverts mortgage loans previously acquired from Desjardins Groupmember caisses into NHA mortgage-backed securities (“NHA-MBSs”) and then transfers them to Canada Housing Trust. These securitizationtransactions are recorded as sales; the loans are therefore removed fromthe consolidated balance sheets since Caisse centrale has surrenderedcontrol over the transferred assets and has received consideration otherthan beneficial interests in these assets.
In securitization transactions, Caisse centrale retains the right to an excessinterest spread, which is initially recorded at fair value on the consolidatedbalance sheets under “Other assets” and is considered a retained interest.The excess interest spread is amortized over the term of the mortgageloans transferred and is recorded in consolidated income under “Tradingactivities.”
Since transfers are made on a fully serviced basis, a servicing liability is initially recorded at fair value and recognized in consolidated incomeunder “Trading activities” over the term of the transferred mortgageloans. The servicing liability is recorded on the consolidated balance sheets under “Other liabilities.”
At the time of transfer, Caisse centrale recognizes the gain or loss on the transfer in consolidated income under “Trading activities,” net oftransaction fees. The gain or loss on the transfer depends on the previouscarrying value of the loans sold as well as the fair value of the assetsreceived and liabilities assumed. This fair value is determined using thepresent value of future expected cash flows taking into account bestestimates, which are based on certain key assumptions made bymanagement, including the forward yield curve for mortgage loans,discount rates proportional to the risks involved and prepayment rates.
ACCEPTANCES AND CUSTOMERS’ LIABILITY UNDERACCEPTANCES
Caisse centrale’s potential liability under acceptances is reported as a liability on the consolidated balance sheets. The recourse of Caisse centraleagainst the customer in the case of a call on commitments of this natureis reported as an offsetting asset of the same amount. Fees paid to Caissecentrale are recognized in consolidated income under “Fees on DesjardinsAcceptances” in “Other income.”
OBLIGATIONS RELATED TO SECURITIES SOLD SHORT
Securities sold short as part of trading activities, which represent Caisse centrale’s obligation to deliver securities sold which were notowned at the time of sale, are recorded as liabilities and are carried at fair value. Realized and unrealized gains and losses thereon are recordedin consolidated income under “Trading activities” in “Other income.”
ASSETS UNDER ADMINISTRATION
Caisse centrale manages liquidities on behalf of third parties. These assetsunder administration are not the property of Caisse centrale and thereforeare not reflected on the consolidated balance sheets. Management feesearned with respect to liquidity management services are recorded inconsolidated income under “Other Income.”
2006 CONSOLIDATED FINANCIAL STATEMENTS
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632006 CONSOLIDATED FINANCIAL STATEMENTS
DERIVATIVES
Caisse centrale uses derivatives for asset/liability management or tradingpurposes. The derivatives most frequently used are forward exchangecontracts, currency, interest rate and credit swaps, forward rateagreements and foreign currency, interest rate and stock index options. All derivatives are recognized at fair value on the consolidated balancesheets. The estimated fair value of derivatives is determined using pricingmodels which incorporate current market prices and the contractual pricesof the underlying instruments, the time value of money, yield curves andvolatility factors. On the consolidated balance sheets, derivatives having a positive fair value are presented as assets, whereas those that have a negative fair value are presented as liabilities, under “Assets related to derivatives” and “Liabilities related to derivatives,” respectively, in“Other.”
Derivatives held for asset/liability management purposes
Derivatives held for asset/liability management purposes are used to manage the interest rate and foreign exchange risk exposure ofconsolidated balance sheet assets and liabilities, firm commitments andforecasted transactions. Certain derivatives qualify for hedge accounting.
a) Derivatives qualifying for hedge accounting
To qualify for hedge accounting, a hedging relationship must bedesignated and documented at its inception. The documentation shouldaddress, among others, the specific risk management strategy, the hedgedasset, liability or cash flows and the measure of the effectiveness of thehedging relationship. Therefore, each hedging relationship has to bedocumented and tested for effectiveness, individually and on a regularbasis, in order to determine, with reasonable assurance, whether it hasremained and will continue to be effective. The derivative must be highlyeffective in offsetting changes in the fair value or cash flows of thehedged item that are attributable to the hedged risk exposure.
Unrealized gains or losses are deferred under “Other assets” or “Otherliabilities” in “Other” and recognized in consolidated income in the sameperiod as the gains, losses, revenues or expenses associated with thehedged item.
A derivative ceases to be designated as a hedge in the followingcircumstances: the hedged item is sold or matures, the hedge ceases to be effective or Caisse centrale discontinues its designation of the hedgingrelationship. When a hedging relationship is discontinued, the differencebetween the fair value and the recognized value of the derivative isdeferred under “Other assets” or “Other liabilities” on the consolidatedbalance sheets and recognized in consolidated income over the expectedremaining term of the hedging relationship being discontinued. When a hedged item is sold or matures before the corresponding derivativematures, any realized or unrealized gain or loss on the derivative isrecognized immediately in consolidated income under “Investmentactivities” in “Other income.”
b) Derivatives not qualifying for hedge accounting
Realized and unrealized gains and losses on derivatives held forasset/liability management purposes that do not qualify for hedgeaccounting are recognized in consolidated income under “Tradingactivities” in “Other income.”
Derivatives held for trading purposes
Derivatives held for trading purposes are mainly used in intermediationactivities to meet the needs of the Desjardins network or its customers.The corresponding realized and unrealized gains and losses are recognizedin consolidated income under “Trading activities” in “Other income.”
SECURITIES PURCHASED UNDER RESALEAGREEMENTS AND SECURITIES SOLD UNDERREPURCHASE AGREEMENTS
Caisse centrale enters into short-term purchases and sales of securitieswith simultaneous agreements to sell and buy them back at a specifiedprice and on a specified date. These agreements are accounted for ascollateralized lending and borrowing transactions and are recorded on the consolidated balance sheets at the selling or repurchase price specifiedunder the agreement. The difference between the specified selling priceand the purchase price is recorded using the accrual method under“Interest income.” Conversely, the difference between the selling priceand the specified repurchase price is recorded under “Interest expense.”
FOREIGN CURRENCY TRANSLATION
Monetary items denominated in foreign currencies are translated at ratesprevailing on the consolidated balance sheet date; income and expensesare translated at the average rates prevailing during the year. Foreignexchange gains or losses arising from the translation or the settlement of a monetary item denominated in a foreign currency are recorded inconsolidated income. Foreign exchange trading positions, including spotand forward contracts, are valued at prevailing market rates and theresulting gains and losses are included in "Other income.”
PREMISES AND EQUIPMENT
Premises and equipment are recorded at cost, less consolidated amortization,and are amortized over their estimated useful lives in accordance with thefollowing methods and annual rates or term:
AmortizationClasses methods Rates/Term
Office furniture and equipment Declining balance 20%Computer equipment Declining balance 30%Leasehold improvements Straight-line Term of the lease
INTANGIBLE ASSETS WITH FINITE USEFUL LIFE
Computer software is recorded at cost, less consolidated amortization, is amortized over its estimated useful life on a straight-line basis at a rate of 20% and is written down when its net carrying value cannot berecovered in the long term. If applicable, any excess of the carrying valueover the fair value is charged to consolidated income.
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EMPLOYEE FUTURE BENEFITS
The employees of Caisse centrale participate in the Desjardins Grouppension plans as part of defined benefit multi-employer pension plans and in supplemental plans which provide pension benefits in excess ofstatutory limits. Furthermore, Caisse centrale also provides life insurancecoverage and health and dental care benefits to its eligible retiredemployees through the Desjardins Group multi-employer group insuranceplan. Caisse centrale applies the recommendations regarding definedcontribution plans since the costs and funding of these plans are notallocated among Desjardins Group member entities.
INCOME TAXES
Caisse centrale accounts for income taxes under the asset-liability method.Under this method, future tax assets and liabilities are calculated based on existing differences between the carrying amount and the tax basis ofassets and liabilities using enacted or substantially enacted tax laws andrates expected to apply at the date such differences reverse. Future taxassets and liabilities are included under “Other assets” or “Otherliabilities,” as applicable.
The recovery of income taxes appearing in the consolidated statements of members’ equity under “Retained earnings” is related to theremuneration of capital stock, which is deductible for income taxpurposes.
ACCOUNTING CHANGES
2006
Implicit Variable Interests
In October 2005, the Emerging Issues Committee issued Abstract No. 157,“Implicit Variable Interests Under AcG-15” (“EIC-157”). This abstractspecifies that implicit variable interests are implied financial interests in an entity which vary in accordance with changes in the fair value of theentity’s net assets, exclusive of variable interests. An implicit variableinterest is similar to an explicit variable interest except that it involvesabsorbing or receiving variability indirectly from the entity.
At the close of the year ended December 31, 2006, the implementationof EIC-157 did not have any impact on the financial reporting of Caisse centrale.
2005
Variable Interest Entities (“VIE”)
On January 1, 2005, Caisse centrale adopted Accounting Guideline 15,“Consolidation of Variable Interest Entities” (“AcG-15”). AcG-15 isharmonized with the new FASB Interpretation FIN46R “Consolidation ofVariable Interest Entities,” and provides guidance on the application of the principles provided in Section 1590, “Subsidiaries.” A variable interestentity is an entity whose equity is insufficient to permit it to finance itsactivities without additional subordinated financial support provided by a third party, or an entity whose equity holders do not have, as a group,the ability to make decisions, the obligation to absorb expected losses or the right to receive residual returns, if any. AcG-15 provides for theconsolidation of a VIE by its primary beneficiary, namely the enterprisethat absorbs a majority of the expected losses and/or has the possibility of receiving the majority of residual returns.
In adopting the guideline on January 1, 2005, Caisse centrale determinedthat it was not the primary beneficiary of any VIE, nor did it have asignificant interest in any VIE. The implementation of AcG-15 did not have any impact on the financial reporting of Caisse centrale.
COMPARATIVE FIGURES
Certain 2005 financial information has been reclassified to conform withthe presentation adopted in 2006.
FUTURE ACCOUNTING CHANGES
Financial instruments
In January 2005, the Canadian Institute of Chartered Accountants(“CICA”) issued new standards entitled “Financial Instruments –Recognition and Measurement” (Section 3855), “Hedges” (Section 3865)and “Comprehensive Income” (Section 1530), which are applicable toCaisse centrale as of January 1, 2007. The main requirements of thesestandards are set out below.
a) Financial instruments - Recognition and measurement
Financial assets will be required to be classified in one of the followingfour categories: held for trading, available for sale, held to maturity, and loans and receivables. Financial liabilities will be classified as held for trading or other. Financial assets and financial liabilities held for trading as well as financial assets available for sale will be recorded on the consolidated balance sheet at fair value. Changes in the fair value of financial assets and liabilities held for trading will be recorded inconsolidated income for the period, while changes in the fair value ofavailable-for-sale financial assets and liabilities will be recorded inconsolidated other comprehensive income until they are derecognized,unless they become impaired and the decline in their fair value is otherthan temporary. Financial assets held to maturity, loans and receivables,and financial liabilities not held for trading will be recognized at theiramortized cost using the effective interest method.
Section 3855 permits any financial asset or liability whose fair value can be reliably measured to be designated, on initial recognition or onadoption of this standard, as being held for trading. The possibility ofdesignating such financial instruments for trading purposes, known as the fair value option, is subject to the requirements set by the Autorité des marchés financiers.
The initial recognition of certain financial guarantees at fair value on thebalance sheet, and the use of the effective interest method for amortizingall transaction costs as well as premiums and discounts for financialinstruments carried at amortized cost are additional consequences of adopting Section 3855.
2006 CONSOLIDATED FINANCIAL STATEMENTS64
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2006 CONSOLIDATED FINANCIAL STATEMENTS
b) Derivative financial instrument and hedges
Derivative financial instruments will be required to be recorded on theconsolidated balance sheet at fair value, including those embedded infinancial instruments or other contracts that are not closely related to thefinancial instrument or the host contract. Derivative instruments that willnot be designated as being part of a hedging relationship will be classifiedas held for trading. Alternatively, the remainder will be designated as partof a fair value hedge or a cash flow hedge. In a fair value hedge, gainsand losses resulting from the revaluation of the fair value of the derivativeinstrument will be recognized in consolidated income. An amountcorresponding to the impact of the designated risk on the hedged itemwill, however, be recognized in consolidated income. In a cash flowhedge, gains or losses resulting from changes in the fair value of theeffective portion of the derivative instrument will be recorded inconsolidated other comprehensive income until the hedged item isrecognized in income. The ineffective portion will be recognizedimmediately in consolidated income.
c) Comprehensive income
The consolidated financial statements will include a “Statement ofComprehensive Income” and accumulated other comprehensive incomewill be presented as a new equity item on the consolidated balancesheets. Other comprehensive income will include, in particular, unrealizedgains and losses on available-for-sale financial assets and the change inthe effective portion of a cash flow hedge transaction.
d) Impact of the adoption of the new financial instrumentrequirements
The adjustments resulting from revaluation of available-for-sale financialassets and hedging instruments designed as part of a cash flow hedgingrelationship will be accounted for in the opening balance of accumulatedother comprehensive income. Other transitional adjustments arising fromthe adoption of Sections 1530, 3855 and 3865 will be recorded in theopening balance of retained earnings as at January 1, 2007. Financialstatements prior to the adoption date of the new standards will not berestated. The application of these accounting standards should not have asignificant impact on the consolidated balance sheets of Caisse centrale.
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66 2006 CONSOLIDATED FINANCIAL STATEMENTS
Note 3
SECURITIES
Maturity 2006 2005
Less than 1 to 3 Over 3 to Over 5 to Over 101 year years 5 years 10 years years Total Total
INVESTMENT ACCOUNT SECURITIESIssued or guaranteed byCanada $ 9,997 $ 62,889 $ 214,336 $ — $ — 287,222 $ 118,014Yield 4.82 % 4.09 % 4.17 % 4.17 % 4.18 %
Provinces and municipalities in Canada 122,920 388,247 325,814 10,374 — 847,355 944,225Yield 4.84 % 4.26 % 4.39 % 6.10 % 4.42 % 4.28 %
U.S. public administrations 12,778 2,461 270 8,152 23,661 21,511Yield 5.15 % 6.12 % 4.09 % 4.86 % 5.14 % 4.69 %
Other securitiesDebt securities of Canadian issuersBanks and financial institutions 1,004,097 117,307 1,121,404 1,433,928Financial asset-backed debt securities 500,955 12,195 980 10,851 524,981 146,261Other — — 153,571 — 194 153,765 11,032Yield 3.89 % 3.89 % 3.45 %
Foreign banks 4,613 4,613 12,431Yield 3.49 % 3.49 % 3.51 %
Total investment account securities $ 1,655,360 $ 583,099 $ 694,701 $21,495 $ 8,346 $2,963,001 $ 2,687,402
TRADING ACCOUNT SECURITIESIssued or guaranteed by
Canada $ — $ — $ 1,946 $ — $ — $ 1,946 $ 325,643Other securitiesBanks and financial institutions — — 80,904 — — 80,904 —Entities included in the scope of consolidation of Desjardins Group — — — — 751,451 751,451 329,072Other — — — — 7,719 7,719 6,781
Total trading account securities $ — $ — $ 82,850 $ — $ 759,170 $ 842,020 $ 661,496
TOTAL SECURITIES $ 1,655,360 $ 583,099 $ 777,551 $21,495 $ 767,516 $3,805,021 $ 3,348,898
Yields are calculated on year-end carrying values, adjusted for amortization of premiums and discounts.
Term-to-maturity classifications are based on the contractual maturity of the security. Securities with no maturity date are classified in the “Over 10 years”category.
Total securities include securities denominated in foreign currencies in the amount of C$1,022,333,264 (2005: C$497,607,427), of which C$782,830,349is denominated in U.S. dollars (2005: C$400,108,492) and C$174,888,915 is denominated in euros (2005: C$32,253,355).
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672006 CONSOLIDATED FINANCIAL STATEMENTS
The following table shows unrealized gains and losses on securities.
2006 2005Gross Gross Estimated Gross Gross Estimated
Carrying unrealized unrealized market Carrying unrealized unrealized market
value gains losses value value gains losses value
INVESTMENT ACCOUNT SECURITIESIssued or guaranteed byCanada $ 287,222 $ 820 $ (475) $ 287,567 $ 118,014 $ 434 $ (85) $ 118,363Provinces and municipalities in Canada 847,355 6,699 (79) 853,975 944,225 25,305 (130) 969,400U.S. public administrations 23,661 139 (36) 23,764 21,511 128 (41) 21,598Other securitiesDebt securities of Canadian issuersBanks and financial institutions 1,121,404 42 (390) 1,121,056 1,433,928 42 (985) 1,432,985Financial asset-backed debt securities 524,981 39 (105) 524,915 146,261 39 (47) 146,253Other 153,765 199 (194) 153,770 11,032 52 — 11,084
Foreign banks 4,613 — — 4,613 12,431 — — 12,431
Total investment account securities $ 2,963,001 $ 7,938 $ (1,279) $ 2,969,660 $ 2,687,402 $ 26,000 $ (1,288) $ 2,712,114
TRADING ACCOUNT SECURITIESIssued or guaranteed byCanada $ 1,946 $ — $ — $ 1,946 $ 325,643 $ — $ — $ 325,643Other securitiesBanks and financial institutions 80,904 — — 80,904 — — — —Entities included in the scope of consolidation of Desjardins Group 751,451 — — 751,451 329,072 — — 329,072Other 7,719 — — 7,719 6,781 — — 6,781
Total trading account securities $ 842,020 $ — $ — $ 842,020 $ 661,496 $ — $ — $ 661,496
TOTAL SECURITIES $ 3,805,021 $ 7,938 $ (1,279) $ 3,811,680 $ 3,348,898 $ 26,000 $ (1,288) $ 3,373,610
The estimated market value of securities is based on the quoted market price, which may not necessarily be realized on sale. Where a quoted price is notavailable, the estimated fair value is determined using market prices of similar securities.
Interest rate sensitivity is the main cause of changes in the estimated market values of the investment account securities. The carrying values of thesesecurities are not adjusted to reflect one-time increases or decreases in the estimated market values due to interest rate changes, as Caisse centrale’s mainintention is to hold these securities to maturity or until market conditions are more favourable for other types of securities. 2
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LOANS2006 2005
Securities purchased under resale agreements $ 16,963 $ —Day, call and short-term loans to investment dealers and brokers 234,000 205,000Public and parapublic institutions 1,526,534 1,476,809Members
Fédération 5,644,679 5,572,070Other 70,000 73,049
Other entities included in the scope of consolidation of Desjardins Group 872,962 955,196Loans purchased from Desjardins Group 78,242 4,891Private sector 2,568,685 2,071,230
$ 11,012,065 $ 10,358,245Allowance for credit losses (87,895) (72,123)
Total $ 10,924,170 $ 10,286,122
Gross impaired loans $ 17,952 $ 10,277Specific provisions (6,800) (3,750)
Impaired loans net of specific provisions $ 11,152 $ 6,527
Total loans before the allowance for credit losses include loans for an amount of C$934,493,179 (2005: C$749,199,009) denominated in U.S. dollars.
The allowance for credit losses relates entirely to loans and commitments classified in the “Private sector” category.
The following table shows an analysis of the allowance for credit losses.
Allowance for credit losses 2006 2005
Balance at beginning of year $ 72,123 $ 61,074Provision for credit losses 16,797 15,150Write-offs (1,250) (3,600)Restructurings — (500)Recoveries 218 30Changes in foreign exchange rates 7 (31)
Balance at end of year $ 87,895 $ 72,123
Consisting of:Specific provisions $ 6,800 $ 3,750General provision for credit losses 81,095 68,373
Total $ 87,895 $ 72,123
2006 CONSOLIDATED FINANCIAL STATEMENTS68
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Note 5
SECURITIZATION OF MORTGAGE LOANSUnder the NHA Mortgage-Backed Securities Program, Caisse centrale securitized residential mortgage loans guaranteed by Canada Housing andMortgage Corporation through the creation of NHA-MBSs. The following table summarizes the new mortgage loan securitization activities in 2006 and 2005:
2006 2005
Loans securitized $ 1,263,047 $ 124,450Net cash proceeds received 1,248,064 121,355Retained interests 57,763 3,807Retained servicing liabilities 19,377 2,233Gain on sale, net of transaction fees 8,349 614Mortgage-backed securities created and retained as trading account securities — 2,390
As at December 31, 2006, Caisse centrale recorded retained interests of $55.1 million (2005: $3.7 million) and retained servicing liabilities of $10.4 million(2005: $2.2 million) on the consolidated balance sheet.
Total loans securitized outstanding amounted to $1.3 billion (2005: $123.3 million).
The following table contains other cash flows from securitization activities:
2006 2005
Cash flows from retained interests $ 7,001 $ 45Servicing fees paid 3,538 71
In addition, amortization of the servicing liabilities amounted to $2.6 million (2005: $70,000).
The key assumptions used in determining the initial fair value of the retained interests as at the date of sale were as follows:
2006 2005
Discount rate 4.32 % 4.38 %Prepayment rate 5% and 15% 1.00 %Weighted average life of mortgage loans 36 months 45 months
No loss on mortgage loans is expected because the mortgage loans transferred are guaranteed.
The sensitivity of the current fair value of retained interests to 10% and 20% adverse changes in the key assumptions is as follows:
2006
Prepayment rate 5% and 15 %Impact of 10% adverse change (718)Impact of 20% adverse change (1,422)
Discount rate 4.32 %Impact of 10% adverse change (426)Impact of 20% adverse change (847)
The sensitivity analysis of key assumptions for 2005 does not reveal any significant impact.
The results of the analysis should be used with caution because changes in fair value based on a variation in assumptions generally cannot be extrapolatedsince the relationship involved may not be linear. It should be borne in mind that each change in one factor may contribute to changes in another,magnifying or counteracting the sensitivities.
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OTHER ASSETS
2006 2005
Interest receivable $ 60,370 $ 74,166Future tax assets (note 11) 20,021 22,330Premises and equipment, net of accumulated amortization of $11,753 (2005: $9,952) 10,494 4,001Intangible assets with finite useful life, net of accumulated amortization of $4,290 (2005: $3,138) 26,666 23,071Income taxes recoverable 4,300 —Amounts receivable from brokers and dealers 52,211 35,265Other 116,597 76,985
Total $ 290,659 $235,818
Note 7
DEPOSITS2006 2005
Payable on Payable on demand a fixed date Total Total
Canada $ 3,358 $ 251,645 $ 255,003 $ 422,085Provinces 138,923 156,669 295,592 590,771Banks and financial institutions — 924,644 924,644 857,236Members
Fédération 1,303,590 728,158 2,031,749 1,062,049Other 105,057 32,118 137,175 64,053
Other entities included in the scope of consolidation of Desjardins Group 247,863 941,849 1,189,712 822,948Other 322,864 8,273,882 8,596,746 8,129,801
Total $2,121,655 $11,308,966 $13,430,621 $11,948,943
Total deposits include deposits in foreign currencies in the amount of C$6,774,957,713 (2005: C$4,668,358,000), of which C$2,276,767,997 (2005:C$2,702,458,000) is denominated in U.S. dollars and C$4,451,092,337 (2005: C$1,783,336,000) is denominated in euros.
Note 8
OTHER LIABILITIES2006 2005
Interest payable $ 60,385 $ 69,886Remuneration of capital stock payable 64,551 117,382Cheques and other items in transit 61,489 43,398Income taxes payable — 1,283Amounts payable to brokers and dealers 481,450 228,523Other 81,638 95,685
Total $ 749,513 $ 556,157
2006 CONSOLIDATED FINANCIAL STATEMENTS70
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Note 9
SUBORDINATED DEBENTUREThe debenture is subordinated to the claims of depositors and certain other creditors.
Maturity Interest rate Terms 2006 2005
March 18, 2013 5.5% Nominal value of € 76,224,509; 5.5% interest payable annually in euros until $ 117,103 $ 105,035 March 18, 2008; thereafter, interest payable quarterly at Euribor plus 1.40%.
Caisse centrale may, with the prior approval of the Autorité des marchés financiers, call the subordinated debenture on March 18, 2008 or at any time inthe event of an applicable tax amendment. Furthermore, Caisse centrale entered into hedging transactions to eliminate foreign exchange exposure.
Note 10
CAPITAL STOCKThe capital stock of Caisse centrale is composed of an unlimited number of Class A capital shares, Class B capital shares and qualifying shares.
Class A capital sharesThe following table presents changes in the number of outstanding shares and their total ascribed value during the year.
2006 2005
Number Amount Number Amount
Capital shares at beginning of year 666,203 $ 666,203 666,203 $ 666,203Capital shares issued 221,000 221,000 — —
Capital shares at end of year 887,203 $ 887,203 666,203 $ 666,203
Class A capital shares can only be issued to members and each has a par value of $1,000. The Board of Directors has the discretionary power todetermine the remuneration to be paid and the payment terms for these shares. They are transferable between members, with the approval of the Board of Directors, and their reimbursement, only possible in the event of the winding-up, insolvency or dissolution of Caisse centrale, issubordinated to the deposits and other debts of Caisse centrale. They are redeemable by Caisse centrale, in whole or in part, with the authorizationof the Autorité des marchés financiers. They are convertible by Caisse centrale, with the approval of the Board of Directors, into shares of otherclasses issued for this purpose.
Class B capital sharesAs at December 31, 2006 and 2005, no Class B capital shares had been issued or were outstanding.
Class B capital shares can only be issued to members. The Board of Directors has the discretionary power to determine the remuneration to be paid andthe payment terms for these shares. The remuneration and payment terms may differ from those for Class A capital shares. They are transferable betweenmembers, with the approval of the Board of Directors, and their reimbursement, only possible in the event of the winding-up, insolvency or dissolution ofCaisse centrale, is subordinated to the deposits and other debts of Caisse centrale. They are redeemable by Caisse centrale, in whole or in part, with theauthorization of the Autorité des marchés financiers. They are convertible by Caisse centrale, with the approval of the Board of Directors, into shares of other classes issued for this purpose.
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Qualifying shares
The following table presents changes in the number of outstanding qualifying shares and their total ascribed value during the year.
2006 2005
Number Amount Number Amount
Qualifying shares at beginning of year 600 $ 3 600 $ 3Qualifying shares issued and unpaid — — — —
Qualifying shares at end of year 600 $ 3 600 $ 3
Qualifying shares can only be issued to members according to the conditions, terms and criteria provided for in the internal management by-laws ofCaisse centrale. Their issue price is set at $5.00 each and they are non-interest-bearing. They are redeemable by Caisse centrale only in the event of thewithdrawal, exclusion, winding-up, insolvency or dissolution of a member. They are not transferable and their reimbursement, only possible in the event of the winding-up, insolvency or dissolution of Caisse centrale, is subordinated to the deposits and other debts of Caisse centrale and to the holders of the other classes of shares.
Note 11
INCOME TAXESThe income taxes as shown in the consolidated financial statements are detailed as follows:
2006 2005Consolidated statements of incomeCurrent income taxes $ 13,980 $ 17,507Future income taxes 2,309 (3,795)
$ 16,289 $ 13,712
Consolidated statements of members’ equityRecovery of income taxes related to the remuneration of capital stock $ 15,604 $ 13,374
$ 685 $ 338
The principal components of the future tax assets and liabilities are as follows:
2006 2005Future tax assetsAllowance for credit losses $ 18,392 $ 16,107Deferred income 1,673 1,474Loan fees 775 715Premises and equipment and intangible assets — 1,469Tax losses carried forward 2,766 2,612Other 382 576
$ 23,988 $ 22,953
Future tax liabilitiesPremises and equipment and intangible assets $ (602) $ —Other (3,365) (623)
$ (3,967) $ (623)
Future tax assets (net) $ 20,021 $ 22,330
The difference between the statutory income tax rate applicable to credit unions and the effective income tax rate is as follows:
2006 2005
Income taxes applicable to credit unions $ 16,233 22.94 % $ 13,678 21.98 %Increase from:• Large corporations tax — — 1,337 2.15• Other (73) (0.10) 567 0.91Future taxes resulting from changes to income tax rates 129 0.18 (1,870) (3.01)
Income taxes, as reported in the consolidated statements of income, and effective tax rates $ 16,289 23.02 % $ 13,712 22.03 %
2006 CONSOLIDATED FINANCIAL STATEMENTS72
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Note 12
DERIVATIVESIn the normal course of business, Caisse centrale offers its customersvarious instruments to meet their needs for protection against different risks,such as fluctuations in foreign exchange and interest rates. Caisse centraleuses some of these instruments to hedge its own exposure to foreignexchange and interest rate risks and to earn trading income. All financialinstruments are subject to regular credit standards, financial controls andother usual monitoring procedures that are normally applied.
Caisse centrale uses derivatives primarily for asset/liability managementpurposes as well as in intermediation activities conducted to meet theneeds of the Desjardins network or its customers (for trading purposes).
Interest rate contracts include interest rate swaps, forward rate agreementsand futures contracts. Interest rate swaps are transactions in which twoparties exchange interest flows on a specified notional principal amount for a predetermined period based on agreed-upon fixed and floating rates. Principal amounts are not exchanged. Forward rate agreements are forward transactions on interest rates, based on a notional principalamount, which call for a cash settlement at a future date for the differencebetween the contractual rate of interest and the market rate. Futurescontracts represent a future commitment to purchase or delivercommodities or financial instruments on a future date at a specified price. Futures contracts are traded in predetermined amounts on organized exchanges and are subject to daily cash margins.
Foreign exchange contracts include forward contracts and currency swaps.Foreign exchange forward contracts represent commitments to exchangetwo currencies at a specified future date based on a rate agreed upon by both parties at the inception of the contract.
Currency swaps are transactions in which fixed interest payments onnotional amounts denominated in different currencies are exchanged. For cross-currency interest rate swaps, fixed and floating interest paymentson notional amounts denominated in different currencies are exchanged.Caisse centrale uses currency swaps and cross-currency interest rate swapsto manage its own asset/liability exposure.
Options are contractual agreements under which the writer grants thepurchaser the right, but not the obligation, to buy (call option) or sell (putoption) by or at a set date a specified amount of a financial instrument at a predetermined price. The writer receives a premium from the purchaserfor this right. Caisse centrale enters into these contracts primarily to servethe needs of customers and to manage its own asset/liability exposure.
Credit swaps are agreements under which the counterparty iscompensated for losses on a designated asset (usually a loan or a bond)should a default or a predetermined triggering event occur.
The credit risk exposure of derivatives corresponds to the risk of creditlosses that can occur if a counterparty does not fully honour its contractualobligations to Caisse centrale and if the market conditions are such thatreplacing the transaction would result in a loss for Caisse centrale. Creditrisk is managed within the authorization limits granted to counterpartiesand the netting programs entered into with significant counterparties.
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Derivatives2006 2005
Notional Replacement Futur credit Credit risk Risk-weighted Replacement Risk-weightedamount cost exposure equivalent balance cost balance
ASSET/LIABILITY MANAGEMENT PURPOSESInterest rate contractsInterest rate swap contracts $ 2,608,632 $ 9,013 $ 9,954 $ 18,967 $ 3,793 $ 20,333 $ 7,615
Total interest rate contracts 2,608,632 9,013 9,954 18,967 3,793 20,333 7,615
Foreign exchange contractsCurrency swap contracts 5,929,267 280 757 274,286 555,044 111,283 39,889 42,269
Total foreign exchange contracts 5,929,267 280,757 274,286 555,044 111,283 39,889 42,269
Total – Asset/liability management purposes $ 8,537,899 $ 289,770 $ 284,240 $ 574,011 $ 115,076 $ 60,222 $ 49,884
TRADING PURPOSESInterest rate contractsInterest rate swap contracts $ 76,954,823 $ 274,425 $ 344,741 $ 619,166 $ 120,079 $319,482 $ 122,596Forward rate agreements 14,701,000 960 3,280 4,240 837 2,645 2,556Futures contracts 5,964,823 — — — — 3,959 —Options purchased 200,680 1,195 1,003 2,198 439 22,537 4,706Options written 200,680 — — — — — —
Total interest rate contracts 98,022,006 276,580 349,024 625,604 121,355 348,623 129,858
Foreign exchange contractsForward contracts 5,558,881 77,158 55,464 131,150 36,222 52,571 23,021Currency swap contracts 383,441 11,995 19,893 31,888 9,127 14,565 7,745Options purchased 276,170 5,541 6,433 11,974 3,827 6,578 3,738Options written 229,566 — — — — — —
Total foreign exchange contracts 6,448,058 94,694 81,790 175,012 49,176 73,714 34,504
Other contractsCredit swaps 1,122,499 990 103,080 104,071 20,814 1,021 9,421Stock index options – purchased 1,985,425 500,462 154,094 654,557 211,247 404,176 179,726Stock index options – written 1,985,425 — — — — — —
Total other contracts 5,093,349 501,452 257,174 758,628 232,061 405,197 189,147
Total – Trading purposes $ 109,563,413 $ 872,726 $ 687,988 $1,559,244 $ 402,592 $827,534 $ 353,509
Total derivatives before impact of master netting agreements $ 118,101,312 $1,162,496 $ 972,228 $2,133,255 $ 517,668 $887,756 $ 403,393
Less impact of master netting agreements1 935,970 340,029 751,177 288,937
Total derivatives $ 226,526 $ 177,639 $136,579 $ 114,456
1 Without the intent of settling the contracts on a net basis or simultaneously
2006 CONSOLIDATED FINANCIAL STATEMENTS74
The following table summarizes the derivatives portfolio and related creditexposure of Caisse centrale.
• Notional amount - Amount to which a rate or price is applied in orderto calculate the exchange of cash flows. Such amounts do not appearon the consolidated balance sheets.
• Replacement cost - The cost of replacing, at estimated fair value, allcontracts which have a positive fair value. The amounts do not take into consideration contracts which permit offsetting of positions or any collateral which may be obtained.
• Future credit exposure - The potential for future changes in valuebased upon a formula prescribed by the Bank for InternationalSettlements (“BIS”).
• Credit risk equivalent - The total of replacement cost and future creditexposure excluding items prescribed by the BIS, namely the replacementcost of foreign exchange forward contracts with an original maturity of less than 14 days and derivative instruments negotiated throughexchanges when they are subject to daily margin requirements.
• Risk-weighted balance - The credit risk equivalent, weighted accordingto the creditworthiness of the counterparty, as prescribed by the BIS.
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The following table presents the term to maturity of the notional amounts of the derivatives.
2006 2005
Maturity
1 year Over 1 to Over 3 to Over Notional Notionalor less 3 years 5 years 5 years amount amount
Interest rate contractsInterest rate swap contracts $ 17,205,390 $ 32,774,806 $ 25,292,824 $4,290,435 $ 79,563,455 $ 66,999 229Forward rate agreements 14,045,000 656,000 — — 14,701,000 7,091,000Futures,contracts 3,652,443 2,312,380 — — 5,964,823 7,402,974Options purchased — 55,000 145,680 — 200,680 2,073,733Options written — 55,000 145,680 — 200,680 2,406,109
Total interest rate contracts 34,902,833 35,853,186 25,584,184 4,290,435 100,630,638 85,973,045
Foreign exchange contractsForward contracts 5,478,299 80,582 — — 5,558,881 5,079,841Currency swap contracts 622,237 2,514,691 3,038,437 137,343 6,312,708 2,796,803Options purchased 184,383 91,787 — — 276,170 282,811Options written 161,085 68,481 — — 229,566 286,425
Total foreign exchange contracts 6,446,004 2,755,541 3,038,437 137,343 12,377,325 8,445,880
Other contractsCredit swaps 81,052 169,836 126,571 745,040 1,122,499 512,153Stock index options – purchased 534,325 814,110 570,715 66,275 1,985,425 1,793,307Stock index options – written 534,325 824,110 560,715 66,275 1,985,425 1,793,307
Total other contracts 1,149,702 1,808,056 1,258,001 877,590 5,093,349 4,098,767
Total derivatives $ 42,498,539 $ 40,416,783 $ 29,880,622 $ 5,305,368 $118,101,312 $ 98,517,692
2006 CONSOLIDATED FINANCIAL STATEMENTS 75
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Note 13
FAIR VALUE OF FINANCIAL INSTRUMENTSThe estimated fair values are intended to approximate amounts at which these financial instruments could be exchanged in a current transaction betweenwilling parties; however, many of the financial instruments lack an available trading market. Therefore, fair values are based on estimates using presentvalue and other valuation techniques which are significantly affected by the assumptions used concerning the amount and timing of estimated future cashflows and discount rates which reflect varying degrees of risk. In addition, the estimated fair values disclosed do not reflect the value of assets andliabilities that are not considered financial instruments, such as premises and equipment and intangible assets with finite useful life. In addition, the valuesof other non-financial intangible assets and liabilities have been excluded. Given the use of subjective judgment in applying a large number of acceptablevaluation and estimation techniques to calculate fair values, the fair value estimates cannot necessarily be compared to those of other financialinstitutions. The estimated fair values reflect market conditions at a specific date and, as such, may not be representative of future fair values. They shouldalso not be interpreted as being realizable in an immediate settlement of the instruments. Detailed information on the estimated fair value of consolidatedon-balance sheet financial instruments and the estimated fair value of the derivatives which are excluded from the table of consolidated on-balance sheetfinancial instruments are presented in the tables below.
Consolidated on-balance sheet financial instruments (excluding derivatives)
2006 2005
Positive/ Positive/Fair Carrying (Negative) Fair Carrying (Negative)
value value difference value value differenceAssetsCash and deposits with financial institutions $ 167,871 $ 167,871 $ — $ 150,859 $ 150,859 $ —Securities 3,811,680 3,805,021 6,659 3,373,610 3,348,898 24,712Loans 10,934,687 10,924,170 10,517 10,300,693 10,286,122 14,571Customers’ liability under acceptances 1,247,000 1,247,000 — 848,000 848,000 —Other 112,581 112,581 — 109,431 109,431 —
LiabilitiesDeposits 13,432,573 13,430,621 (1,952) 11,973,106 11,948,943 (24,163)Acceptances 1,247,000 1,247,000 — 848,000 848,000 —Obligations related to securities sold short 16,954 16,954 — 78,643 78,643 —Subordinated debenture 119,066 117,103 (1,963) 110,114 105,035 (5,079)Other 667,875 667,875 — 703,847 703,847 —
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Derivatives2006 2005
Positive Negative Net fair Positive Negative Net fair value value value value value value
ASSET/LIABILITY MANAGEMENT PURPOSESInterest rate contractsInterest rate swap contracts $ 9,013 $ 10,530 $ (1,517) $ 20,333 $ 41,505 $ (21,172)
Total interest rate contracts 9,013 10,530 (1,517) 20,333 41,505 (21,172)
Foreign exchange contractsCurrency swap contracts 280,757 172,699 108,058 39,889 307,076 (267,187)
Total foreign exchange contracts 280,757 172,699 108,058 39,889 307,076 (267,187)
Total – Asset/liability management purposes $ 289,770 $ 183,229 $106,541 $ 60,222 $ 348,581 $(288,359)
TRADING PURPOSESInterest rate contractsInterest rate swap contracts $ 274,425 $ 361,304 $ (86,879) $ 319,482 $ 426,378 $(106,896)Forward rate agreements 960 1,673 (713) 2,645 2,328 317Futures contracts — 1,946 (1,946) 3,959 146 3,813Options purchased 1,195 — 1,195 22,537 — 22,537Options written — 1,195 (1,195) — 24,414 (24,414)
Total interest rate contracts 276,580 366,118 (89,538) 348,623 453,266 (104,643)
Foreign exchange contractsForward contracts 77,158 51,956 25,202 52,571 59,188 (6,617)Currency swap contracts 11,995 11,581 414 14,565 14,381 184Options purchased 5,541 127 5,414 6,578 — 6,578Options written — 5,214 (5,214) — 7,259 (7,259)
Total foreign exchange contracts 94,694 68,878 25,816 73,714 80,828 (7,114)
Other contractsCredit swaps 990 6,334 (5,344) 1,021 1,071 (50)Stock index options – purchased 500,462 — 500,462 404,176 — 404,176Stock index options – written — 500,462 (500,462) — 404,176 (404,176)
Total other contracts 501,452 506,796 (5,344) 405,197 405,247 (50)
Total – Trading purposes $ 872,726 $ 941,792 $ (69,066) $ 827,534 $ 939,341 $(111,807)
Total derivatives before impact of master netting agreements $1,162,496 $1,125,021 $ 37,475 $ 887,756 $1,287,922 $(400,166)
Less impact of master netting agreements1 935,970 935,970 — 751,177 751,177 —
Total derivatives $ 226,526 $ 189,051 $ 37,475 $ 136,579 $ 536,745 $(400,166)
1 Without the intent of settling the contracts on a net basis or simultaneously
The following table presents the derivatives recorded on the consolidated balance sheets:
Assets Liabilities2006 2005 2006 2005
Fair value of derivatives – Asset/liability management purposes $ 289,770 $ 60,222 $ 183,229 $ 348,581Fair value of derivatives – Trading purposes 872,726 827,534 941,792 939,341
Total $1,162,496 $ 887,756 $1,125,021 $1,287,922
2006 CONSOLIDATED FINANCIAL STATEMENTS 77
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The following methods and assumptions were used to estimate thefair value of the financial instruments:
• Financial instruments valued at carrying value Due to their short-term maturity, the carrying values of certain consolidated on-balancesheet financial instruments were assumed to approximate their fairvalues. These financial instruments include “Cash and deposits withfinancial institutions,” “Securities purchased under resale agreements,”“Commitments under repurchase agreements,” “Obligations related to securities sold short,” “Customers’ liability under acceptances,”“Acceptances” and “Accrued interest.”
• Securities The estimated market values of securities are presented innote 3 to the consolidated financial statements. They are determinedbased on quoted market prices and may not be realized upon sale.When the quoted price of a security is not available, the fair value is estimated using quoted market prices of similar securities.
• Loans The fair values of loans are estimated using a discounted cashflow calculation that uses market interest currently charged for similarnew loans as at December 31 and expected amounts at maturity. For certain floating rate loans, for which rates are revised frequently,estimated fair values are assumed to be equal to the carrying values.
• Deposits The fair values of deposits at floating rates or with no stated maturity are assumed to be equal to their carrying values. The estimated fair values of fixed rate deposits are determined bydiscounting the contractual cash flows, using market interest ratescurrently offered for deposits of similar remaining maturities.
• Subordinated debenture The fair value of the debenture is based oncurrent rates offered to Caisse centrale for debt securities of the similarremaining maturities.
The following methods and assumptions were used to estimate thefair value of off-balance sheet credit instruments and derivatives:
• Off-balance sheet credit instruments The commitments to extendcredit are primarily at floating rates and therefore do not expose Caisse centrale to interest rate risk.
• Derivatives The fair values of exchange-traded derivatives are basedon quoted market prices or dealer quotes. Fair values of non-exchange-traded or over-the-counter derivatives are generally calculated aspresent value, net of contractual cash flows, using prevailing marketrates for instruments with similar characteristics and maturities.
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Note 14
INTEREST RATE SENSITIVITYThe following table shows Caisse centrale’s position with regard to interest rate sensitivity as at December 31, 2006. This is the position at that particulardate and could have subsequently changed, taking into account forecasted interest rates and customers’ preferences for products and maturities.
Assets and liabilities recorded on the consolidated balance sheets and derivatives presented in the following table are reported in time frames based onthe earlier of their contractual repricing date or maturity date. Certain on-balance sheet items, such as investments in equity securities and members’equity, do not create an interest rate exposure for Caisse centrale. These items are reported in the non-interest sensitive column of the table.
Floating 0 to 3 Over 3 to Over 6 to Over 1 to Over 5 Non-interest(in millions of dollars) rate months 6 months 12 months 5 years years sensitive TotalAssetsCash and deposits with financial institutions $ — $ 93 $ — $ — $ — $ — $ 75 $ 168Effective interest rate1 4.25 %Securities- Investment account 893 1,412 28 144 457 29 — 2 963
Effective interest rate1 4.00 % 4.38 % 4.74 % 4.13 % 5.47 %- Trading account 81 — — — 2 — 759 842
Effective interest rate1 5.78 %Loans 3,259 6,187 260 257 967 84 (90) 10,924
Effective interest rate1 4.96 % 4.79 % 4.73 % 5.71 % 6.47 %Other — 595 46 (11) (338) (12) 2,420 2,700
Total assets $ 4,233 $ 8,287 $ 334 $ 390 $ 1,088 $ 101 $ 3,164 $ 17,597
Liabilities and members’ equityDeposits $ 6,780 $ 5,576 $ 220 $ 211 $ 644 $ — $ — $ 13,431
Effective interest rate1 4.64 % 4.45 % 4.23 % 4.62 %Obligations related to securities sold short — 17 — — — — — 17
Effective interest rate1 4.02 % 4.02 %Subordinated debenture — — — — 117 — — 117
Effective interest rate1 5.50 %Other — 218 39 — (76) (12) 2,952 3,121Members’ equity — — — — — — 911 911
Total liabilities and members’ equity $ 6,780 $ 5,811 $ 259 $ 211 $ 685 $ (12) $ 3,863 17,597
Consolidated balance sheet gap $ (2,547) $ 2,476 $ 75 $ 179 $ 403 $ 113 $ (699) $ —Derivatives2 — 2,914 (1,401) (370) (1,256) 113 — —
Total interest rate sensitivity gap $ (2 547) $ 5 390 $ (1 326) $ (191) $ (853) $ 226 $ (699) $ —
2006 cumulative interest rate sensitivity gap $ (2,547) $ 2,843 $ 1,517 $ 1,326 $ 473 $ 699 $ — $ —
2005Consolidated balance sheet gap $ (1,984) $ 464 $ 140 $ 1,028 $ 964 $ 271 $ (883) $ —Derivatives2 — 1,021 (791) 238 (313) (155) — —
Total interest rate sensitivity gap $ (1,984) $ 1,485 $ (651) $ 1,266 $ 651 $ 116 $ (883) $ —
2005 cumulative interest rate sensitivity gap $ (1,984) $ (499) $ (1,150) $ 116 $ 767 $ 883 $ — $ —
1 The effective interest rates shown express the historical rates of the fixed rate instruments stated at amortized cost and the current market rates of the instruments stated at fair value.2 Derivatives represent the net notional amounts of derivative financial instruments such as forward rate agreements and interest rate swaps, which are used to manage interest rate risk.
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Note 15
CONCENTRATIONS OF CREDIT RISK Concentrations of credit risk exist when a certain number of borrowers or counterparties involved in similar activities are located in the same geographicarea or present comparable economic characteristics. Their ability to meet contractual obligations can also be affected by changes in economic, political or other conditions. Management considers that the following concentrations are within acceptable limits.
Consolidated balance sheet assetsOf total loans as at December 31, 2006 and 2005, 97.3% and 98.0% respectively were made to borrowers from Canada, with the largest concentrationin Quebec (2006: 85.4% and 2005: 85.8%) and Ontario (2006: 7.7% and 2005: 7.1%).
DerivativesThe following table shows the breakdown of the replacement cost of derivatives by geographic area, on the basis of the country of domicile of thecounterparties as at December 31:
2006 % 2005 %
Canada $ 390,548 34 $ 439,935 50International 771,948 66 447,821 50
Total $1,162,496 100 $ 887,756 100
The following table shows the breakdown of the replacement cost of derivatives by the counterparties’ industry segment as at December 31:
2006 2005Interest Foreignrate exhange Other
contracts % contracts % contracts % Total Total
Banks $ 192,611 67 $ 320,878 85 $ 280,182 56 $ 793,671 $ 523,986Members
Fédération 73,709 26 3,903 1 — — 77,612 111,775Other 2,955 1 — — — — 2,955 3,843
Other entities included in the scope of consolidation of Desjardins Group 1,049 1 13,032 4 — — 14,081 14Government 9,233 3 10,774 3 — — 20,007 18,537Private sector 6,036 2 26,864 7 221,270 44 254,170 229,601
Total $ 285,593 100 $ 375,451 100 $ 501,452 100 $ 1,162,496 $ 887,756
Note 16
COMMITMENTS AND GUARANTEESa) Off-balance sheet credit instruments
In the normal course of business, Caisse centrale offers its customers various instruments to meet their needs for liquidity. All financial instruments aresubject to credit standards, financial controls and other usual monitoring procedures that are normally applied.
The primary purpose of these instruments is to ensure that funds are available to a customer as required. Caisse centrale’s policy with respect to collateralfor these instruments is generally the same as the one which applies to loans.
Guarantees and standby letters of credit, which represent irrevocable commitments that Caisse centrale will make payments in the event that a customercannot meet its financial obligations to third parties, carry the same credit risk as loans. Cash requirements under guarantees and standby letters of creditare considerably less than the amount of the commitment because Caisse centrale does not generally expect the third party to draw funds under theagreement.
Commitments to extend credit represent unused portions of authorizations to extend credit in the form of loans, guarantees or letters of credit. Caisse centraleis exposed to a potential credit risk in an amount equal to the total unused commitments. However, most commitments to extend credit are contingentupon customers maintaining specific credit standards.
The total commitments to extend credit do not necessarily represent future cash requirements, since many of these commitments will expire or terminatewithout being funded.
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The following table discloses the contractual amount and the risk-weighted balance, based on the capital adequacy rules prescribed by the BIS.
2006 2005
Contractual Risk-weighted Contractual Risk-weightedamount balance amount balance
Guarantees and standby letters of credit $ 608,241 $ 409,479 $ 444,330 $ 246,400Commitments to extend credit (original term to maturity)
Over one year 1,373,274 656,182 1,759,089 690,574One year or less and conditionals 7,611,957 — 7,265,081 —
Commitments to purchase assets 12,076 — 7,127 —
Total $ 9,605,548 $ 1,065,661 $ 9,475,627 $ 936,974
b) Contractual commitments
As at December 31, 2006, future minimum commitments under long-term leases and service contracts were as follows:
2012 and2007 2008 2009 2010 2011 thereafter Total
$1,811 $1,524 $1,509 $1,473 $1,293 $7,126 $14,736
Of the total commitments, $9,669,000 was for commitments made with entities included in the scope of consolidation of Desjardins Group.
c) Guarantees
A guarantee is a contract or indemnification agreement that contingently requires Caisse centrale to make payments to the guaranteed party; as forinstance, (i) based on changes in an interest rate, a foreign currency exchange rate, a security or commodity price, or a price or rate index, or the occurrenceor non-occurrence of a specified event that is related to an asset, a liability or an equity security of the guaranteed party; (ii) based on another entity’s failureto perform under an obligating agreement or (iii) another entity’s failure to repay its debt when it becomes due and payable.
Caisse centrale has issued the following guarantees to third parties:
Guarantees and standby letters of credit
Guarantees and standby letters of credit (including Publi-privilège securities) represent an irrevocable commitment by Caisse centrale to make payments in the event that a customer cannot meet its financial obligations to third parties.
These instruments are generally collateralized in accordance with the same policy as the one which Caisse centrale applies with respect to loans. The termof these products is not more than five years.
The allowance for credit losses covers all credit risks, including those related to guarantees and standby letters of credit.
Other indemnification agreements
In the normal course of its operations, Caisse centrale enters into a number of agreements containing indemnification provisions such as those normallyrelated to purchase agreements, service delivery agreements and lease agreements. Under these agreements, Caisse centrale may be liable for indemnifyingthe counterparty pursuant to amendments to statutes and regulations (including tax rules) or as a result of litigation. The term of the agreements variesfrom one contract to the next. Caisse centrale is not in a position to make a reasonable estimate of the maximum amount that it could be required to paycounterparties. Historically, payments made under these agreements have been negligible. No amounts have been recognized on the consolidated balancesheets with respect to these agreements
Derivative products
Caisse centrale trades in credit swaps under which the counterparty is compensated for losses it incurs on designated property (usually a loan or a bond)should a default or a predetermined triggering event occur. The maximum amount of the guarantee is equal to the notional amount of the swaps andtotalled $358,060,000 as at December 31, 2006.
MAXIMUM POTENTIAL AMOUNT OF FUTURE PAYMENTS AS GUARANTEES
2006 2005
Guarantees and standby letters of credit $ 250,181 $ 296,863Credit swaps 358,060 147,467
Total $ 608,241 $ 444,330
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2006 CONSOLIDATED FINANCIAL STATEMENTS82
d) Pledged assets
The assets pledged as security by Caisse centrale in the normal course of business are presented in the table below:
2006 2005
Assets pledged to the following counterparties:Bank of Canada $ 160,000 $ 140,000Foreign central bank — 15,461Clearing systems, payment systems and depositories 145,200 108,200
$ 305,200 $ 263,661
Assets pledged for the following transactions:Derivatives transactions 9,400 20,800
Total $ 314,600 $ 284,461
e) Tactical rate management term savings
In connection with the various sales campaigns for tactical rate management term savings carried out by the Desjardins caisses, the Fédération hasdeposited with Caisse centrale a portion of the amounts raised during each of the campaigns. In order to earn a return on the amounts undermanagement, Caisse centrale invests in fixed income financial instruments (including Government of Canada bonds, derivative financial instrumentcontracts and other investment vehicles). The face value of these investments of Caisse centrale exceeds the amounts deposited by the Fédération.Caisse centrale deposits an amount equal to the positive returns it earns on these investments in the Fédération’s account and recovers from the latternegative returns. However, the cumulative balance of a campaign account cannot become negative as a result of recoveries by Caisse centrale. As atDecember 31, 2006, the face value of the Caisse centrale investments was $609,490,000 (2005: $961,751,500) and the balance of the amounts deposited by the Fédération amounted to $35,846,000 (2005: $50,268,000).
Note 17
OTHER TRANSACTIONS WITH DESJARDINS GROUPThese transactions with members and other entities included in the scope of consolidation of Desjardins Group represent those not disclosed elsewhere in the consolidated financial statements. Pursuant to its Constituent Legislation, the Fédération and its member caisses are members of Caisse centrale.Consequently, transactions with the Fédération for the benefit of its member caisses are carried out under more favourable conditions for the membercaisses than those granted to unrelated third parties. These transactions are measured at the exchange amount, which is the amount of considerationestablished and agreed to by the related parties. Transactions entered into for the Fédération’s own financing needs and with other entities included in the scope of consolidation of Desjardins Group are carried out under similar conditions to those negotiated with unrelated third parties. Thesetransactions are in the normal course of business of Caisse centrale and are measured at the exchange amount, which approximates fair market value and is the amount of consideration established and agreed to by the related parties.
2006 2005
Members Other entities Members Other entities__________________________included in
__________________________included in
the scope of the scope of consolidation consolidationof Desjardins of Desjardins
Fédération Other Group Fédération Other GroupAssetsDay, call and short-term loans to investment dealers and brokers $ — $ — $ 234,000 $ — $ — $ 205,000
Assets related to derivatives 9,703 67,962 2,031 74,441 40,299 9,127Customers’ liability under acceptances 1,038,000 — — 751,500 — —Other assets 21,060 4,969 5,744 19,515 6,128 5,597LiabilitiesLiabilities related to derivatives 526,992 121,167 7,037 599,614 46,039 2,120Acceptances — — 1,247,000 — — 848,000Other liabilities 75,292 5,720 6,902 119,919 9,660 5,161IncomeInterest income 207,264 4,879 54,618 154,804 1,620 44,974Interest expense 32,396 2,855 44,123 19,999 2,697 26,367Other income (23,828) 10,868 (5,597) 63,516 57,553 9,905Non-interest expense 18,035 14 2,975 15,892 17 2,646
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Note 18
EMPLOYEE FUTURE BENEFITSCaisse centrale employees who are 25 years of age or older are enrolled in the Desjardins Group multi-employer pension plans. An actuarial valuation of the plan is performed at least once every three years. The most recent actuarial valuation, dated January 1, 2004, showed a stated funding excess of $44.5 million and a solvency deficiency of $33.3 million. To eliminate this deficiency, Desjardins Group employers must collectively make annual specialpayments of $7.6 million, of which Caisse centrale’s share is $99,000, from January 1, 2004 to December 31, 2008 or until an actuarial valuation shows that the Plan does not have a solvency deficiency.
The amount charged to consolidated income and disbursed as employer contributions under the pension plan was $2,281,000 in 2006 (2005: $2,053,000).
Caisse centrale provides additional defined benefit pension plans to certain active and retired executive employees. In order to meet its future obligationsunder these plans, $3,504,000 (2005: $2,781,000) was recorded under “Other” in “Other liabilities.” The expense for the year totalled $749,000 (2005:$518,000).
Caisse centrale also provides life insurance coverage and health and dental care benefits to its eligible retired employees through the Desjardins Group multi-employer group insurance plan. This group plan is not funded. Employer contributions with respect to group insurance offered to retired employeescharged to consolidated income totalled $67,000 in 2006 (2005: $59,000).
The total cash payments for employee future benefits in 2006, which are comprised of Caisse centrale’s contributions to the multi-employer pension plans and the amounts paid directly to retirees under the Desjardins Group multi-employer group insurance plan and additional pension plans, amounted to$2,374,000 (2005: $2,138,000).
Note 19
SEGMENTED INFORMATIONCaisse centrale conducts its activities in three segments. Each segment offers different services, uses separate strategies and is managed by a senior vice-president.
The accounting policies used by the segments are the same as those described in the significant accounting policies. Caisse centrale measures theperformance of these segments based on the gross income generated by each segment. Non-interest expense is managed on a consolidated basis andis not allocated by segment.
The following table summarizes the consolidated financial results of Caisse centrale by business segment:
Financing Capital Market Other Total
2006 2005 2006 2005 2006 2005 2006 2005
Net interest income $ 57,568 $ 52,508 $ 53,965 $ 43,709 $ 7,147 $ 6,147 $ 118,680 $ 102,364Other income 22,180 19,536 39,600 32,417 8,303 7,308 70,083 59,261
Gross income $ 79,748 $ 72,044 $ 93,565 $ 76,126 $ 15,450 $ 13,455 $ 188,763 $ 161,625
Average assets1 $ 7,097,694 $ 6,543,157 $ 8,130,970 $ 7,232,588 $ 192,540 $ 192,819 $ 15,421,204 $13,968,564
1 Assets are disclosed on an average basis, as this basis is the most relevant to a financial institution and is the measure examined by Caisse centrale’s management.
Financing segment This segment offers a range of financial products and services and grants financing in the form of lines of credit and term loans to members and other entities included in the scope of consolidation of Desjardins Group, public and parapublic entities, and private sector clients. This segment also includes cross-border financing for clients of the subsidiary Desjardins Commercial Lending Corp. U.S.A. and the U.S. branch.
Capital Market segment This segment manages Caisse centrale’s assets and liabilities, securities and derivatives portfolios, and the cash ofDesjardins Group.
Other “Other” combines the international sector and the unallocated income from corporate departments. This segment also includes the operations of Desjardins Bank, N.A. Total gross income and total average assets of the subsidiary totalled $6.0 million and $180 million in 2006 (2005: $6.1 millionand $173 million).
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84 CONSTITUTION, REGULATION AND CONTROL
CONSTITUTION, REGULATION AND CONTROL
CONSTITUTION
Caisse centrale Desjardins du Québec was created on June 22, 1979 by an Act to amend the Act respecting La Confédération des caisses populaires etd'économie Desjardins du Québec (1979 S.Q., c. 46), replaced on June 22, 1989 by an Act respecting the Mouvement des caisses Desjardins (1989 S.Q.,c. 113), which was replaced on July 1, 2001 by the Act respecting the Mouvement Desjardins (2000 S.Q., c. 77). Caisse centrale Desjardins du Québecmay also be identified under the name “Caisse centrale.” Pursuant to its Constituent Legislation, Caisse centrale continues its existence as a financialservices cooperative and is therefore also governed by the Act respecting financial services cooperatives (2000 S.Q., c. 77) as if it were a federation withinthe meaning of that Act.
Caisse centrale, through its holding company Desjardins FSB Holdings, Inc., incorporated under the laws of the State of Delaware, USA, holds theaggregate of the capital stock of Desjardins Federal Savings Bank, a savings and loan association incorporated under US federal law which has its place of business in Hallandale Beach, Florida, USA.
The capital stock of Caisse centrale is composed of an unlimited number of qualifying shares and an unlimited number of Class A capital shares and ClassB capital shares subscribed for by its members. These shares can be paid in full or in instalments in accordance with the payment terms and in the casesdetermined by resolution of the Board of Directors of Caisse centrale.
The qualifying shares with an issue price of $5.00 each are reimbursed only in the event of the winding-up, insolvency or dissolution of Caisse centraleand are redeemable only in the event of the withdrawal, exclusion, winding-up, insolvency or dissolution of the member. The capital shares with a parvalue of $1,000 each are reimbursed only in the event of the winding-up, insolvency or dissolution of Caisse centrale and are redeemable with theauthorization of the Autorité des marchés financiers.
The shares of the capital stock of Caisse centrale are held primarily by the Fédération des caisses Desjardins du Québec, which, with its member caisses, is a full member of Caisse centrale under its Constituent Legislation, and by the three federations of caisses populaires in Ontario, Manitoba and NewBrunswick, which are auxiliary members of Caisse centrale.
The general meeting of Caisse centrale comprises the members of the general meeting of the Fédération des caisses Desjardins du Québec, namely thedelegates of the caisses and a representative from the Fédération des caisses Desjardins du Québec. Under the provisions of the Constituent Legislation,the Board of Directors of Caisse centrale must be composed of at least three quarters of the Board members of the Fédération des caisses Desjardins du Québec (other than its president), who shall account for over one half of the Board members of Caisse centrale. As at the date of this annual report,the members of the Board of Directors of the Fédération des caisses Desjardins du Québec constitute all of the members of the Board of Directors ofCaisse centrale. For the duration of his mandate, the president of the Fédération des caisses Desjardins du Québec is the Chairman of the Board and the Chief Executive Officer of Caisse centrale.C
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REGULATION AND CONTROL
The Autorité des marchés financiers is responsible for the annual inspection and supervision of Caisse centrale. The Act respecting financial servicescooperatives governs the control exercised by the Autorité des marchés financiers with regard to the management, transactions and solvency of Caisse centrale and to conflicts of interest and self-dealings.
The Autorité des marchés financiers may make any examination and investigation he considers necessary or expedient into the internal affairs andactivities of Caisse centrale, and order any inquiry into any matter within his jurisdiction.
The Autorité des marchés financiers may request from Caisse centrale statements, statistics, reports and any other information he deems appropriate to enable him to determine whether Caisse centrale complies with the Constituent Legislation and the applicable provisions of the Act respecting financial services cooperatives. The Autorité des marchés financiers may, with respect to the financial statements and when deemed expedient, prescribeaccounting rules that contain specific requirements or different requirements than those under Canadian generally accepted accounting principles.
Since the Fédération des caisses Desjardins du Québec and its member caisses can elect the majority of its directors, Caisse centrale is deemed to becontrolled by the Fédération des caisses Desjardins du Québec within the meaning of the Act respecting financial services cooperatives. This Act thereforeconfers the normative powers applicable to Caisse centrale, notably with respect to capitalization and investments, on the Fédération des caissesDesjardins du Québec.
Caisse centrale is required to maintain, for its operations, an adequate capital base to ensure sound and prudent management in accordance with the standards adopted by the Fédération des caisses Desjardins du Québec and approved by the Autorité des marchés financiers.
Caisse centrale appoints annually, as auditor, a firm of chartered accountants to conduct the audit of its accounting records and to report to the Autoritédes marchés financiers as prescribed by the Constituent Legislation, the Act respecting financial services cooperatives and government regulations.
Caisse centrale establishes, in accordance with its Constituent Legislation, an Audit Commission composed of no less than three members from its Board of Directors, and a Board of Ethics consisting of no less than three members elected at the general meeting among its members. The AuditCommission reviews the financial statements of Caisse centrale and ensures that its operations are in compliance with the provisions of the applicablelegislation and the orders and written instructions of the Autorité des marchés financiers. The Board of Ethics is responsible for adopting and implementingrules to protect Caisse centrale and its members with respect to self-dealings, disclosure requirements, privacy of information and conflicts of interest.
Caisse centrale is registered with the Régie de l’assurance-dépôts du Québec.
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86 CORPORATE GOVERNANCE
CORPORATE GOVERNANCE
Caisse centrale Desjardins has developed a corporate governance program aligned with that of the Fédération des caisses Desjardins du Québec. By using asingle strategic management structure, whose purpose includes ensuring coherence and consistency of Desjardins Group’s main orientations, the Fédérationand Caisse centrale share the same directors.
The corporate governance policy of Caisse centrale is based on that of the Fédération and the guidelines adopted by the Canadian SecuritiesAdministrators in Policy Statement 58-201on Corporate Governance Guidelines.
HIGHLIGHTS
In 2006, Caisse centrale established various initiatives to strengthen its corporate governance. The main ones are:
• Continuation of the implementation of the Integrated Risk Management program and the Basel Accord.
• Continuation of the work on the financial governance project, in particular the assessment of internal controls for documentation and internal controlassessment consistent with market practices and expectations, in compliance with the regulatory provisions on certifications of financial reportingadopted by the Canadian Securities Administrators.
• Implementation of a specific oversight for the operations of the Caisse centrale Desjardins U.S. branch under the supervision of a team of executives of Caisse centrale.
• Improvements in the process for filing advance notices of proposal to be submitted at Caisse centrale’s General Meeting.
• Update of the document entitled “Rôles et responsabilités des instances démocratiques et décisionnelles” (Roles and responsibilities of democratically-elected and decision-making entities) clarifying the roles and responsibilities shared among the various entities of the Fédération, Caisse centrale,Desjardins Venture Capital and Desjardins Trust.
CORPORATE GOVERNANCE POLICY OF CAISSE CENTRALE
The corporate governance policy of Caisse centrale is based on the policy adopted by the Fédération and describes what it must do to respect the spirit of the industry guidelines on corporate governance, while adapting these guidelines to its cooperative nature as a Desjardins Group financial services member.
The first difference is a fundamental one because it relates to the very purpose behind the decisions of Desjardins Group with respect to corporategovernance. Ultimately, the purpose of these decisions is to enable Desjardins Group to carry out its mission, which is to contribute to improving theeconomic and social well-being of individuals and communities. It is guided by long-term objectives and is focused on creating economic value for itsowner-users, i.e., caisse members.
This value creation also allows Desjardins Group to contribute to the strengthening of the Canadian cooperative financial sector by forming strategicpartnerships. To attain these objectives, Desjardins Group gives itself the means to ensure sufficient and satisfactory profitability, which in turn allows it to ensure its longevity and respect its cooperative difference.
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APPLICATION OF CORPORATE GOVERNANCE GUIDELINES
MANDATE OF THE BOARD OF DIRECTORS
1) Stewardship of Caisse centrale
The Board of Directors assumes full stewardship responsibility for Caisse centrale by administering its business in a sound and prudent manner. It ensures
that procedures and structures are established so that it can fully play its role. Periodically, it reviews its operations from the standpoint of continued
improvement and safeguards the assets of Desjardins Group and its 5.5 million members, and of its clients.
The Board exercises all the powers of Caisse centrale, except for those that it may delegate from time to time to its commissions and committees. It assumes
the following responsibilities in particular:
a. Culture of Integrity
The Board of Directors is responsible for ensuring compliance with Desjardins Group’ cooperative values and permanent values, namely “money at the
service of human development, democratic action, personal commitment, integrity and rigour, and solidarity with the community.”
In this context, it is also responsible for enforcing compliance with Desjardins Group’s Code of Ethics and Professional Conduct, and rules specific to
Caisse centrale among members of Management, employees and elected officers. A support structure for the activities of Caisse centrale’s Board of
Ethics and Professional Conduct enables it to raise awareness, conduct training and provide advisory services, giving concrete expression to the efforts
to ensure compliance with this Code and the specific rules which provide for the possibility of imposing penalties for violations. Caisse centrale also has
a confidential whistleblowing procedure for reporting actions contrary to the Code of Ethics and Professional Conduct, the specific rules and regulatory
oversight rules.
Desjardins Group’s Code of Ethics and Professional Conduct, is available to the public on its site at www.desjardins.com and on its Intranet, where the
specific rules applicable to Caisse centrale are also available. All who are active within Caisse centrale are invited to demonstrate ethics based on honesty,
transparency, social responsibility and altruism. It is up to the Board of Ethics and Professional Conduct, which is accountable to the General Meeting of
Caisse centrale, to ensure the development of the Code and specific rules and to issue notices as needed.
b. Strategic Planning Process
The Board of Directors has implemented a continuous strategic and financial planning process for Caisse centrale in compliance with that of Desjardins
Group, which includes the preparation of a capitalization plan. It is supported by the Desjardins Group Strategic Management Structure Committee in
its responsibilities to ensure, from a single strategic management perspective, that strategic and financial plans and orientations are incorporated
throughout the caisses and subsidiaries and that business development strategies are consistent and coherent, all while being mindful of the risks
involved. This strategic plan is communicated to all Desjardins Group components to ensure a shared understanding. From the strategic and financial plan
stems the cooperative network’s business plan and an operational plan. Responsibility for implementing the Group’s strategic and financial plan is assigned
to the Group’s Strategic Management Structure Committee. The Board of Directors of Caisse centrale also adopts a triennial strategic and financial plan
that is updated annually.
c. Identification and Management of Main Risks
The Board of Directors is responsible for identifying the main risks of Caisse centrale and ensures that the required systems are in place for their integrated
management. Caisse centrale has the support of the Integrated Risk Management Division, which operates in tandem with the Fédération des caisses
Desjardins du Québec. The Board of Directors of Caisse centrale, supported by its Risk Management Commission, ensures that it works consistently with
its Audit Commission, which remains responsible for risks connected with the process for financial reporting.
d. Succession Planning
The Board of Directors oversees the development of the succession planning program and is supported in this task by Desjardins Group’s Human
Resources Division as part of a three-year human resources plan. The Human Resources Commission ensures that this plan is implemented and reports
to the Board of Directors or makes recommendations to it.
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e. Integrity of Management Information and Internal Control Systems
The Board of Directors, seconded by its Audit Commission, ensures the implementation of effective control systems (accounting, administrative and
management) to safeguard the integrity of its operations and obtain the required accountability from managers. The Board is supported in this
responsibility by Desjardins Group’s Internal Auditor. Work is in progress to meet the new requirements of the Canadian Securities Administrators
concerning the certification of financial reporting and thereby improve the documentation of related controls.
The Board of Directors also ensures that the Management Committee of Caisse centrale provides the Board and its commissions and committees
with information that is complete, timely, and adapted to the particular needs of the Board members so that they may take advantage of business
opportunities as they arise and also measure the risks involved. Board members are asked to assess the quality of each file that supports decisions made,
as it is submitted.
Board members receive a quarterly management information report that combines the main financial and non-financial indicators that will enable them
to assess Caisse centrale’s situation and the status of projects. The Board ensures that appropriate policies and procedures are in place to facilitate the
production and presentation of this information.
To effectively carry out its role, the Board of Directors of Caisse centrale meets regularly according to a predetermined schedule. The directors receive
the agenda and any appropriate documentation far enough in advance to ensure productive discussions and facilitate the decision-making process.
They have technology tools that give them access to the documentation with respect to meetings and the monitoring of the activities of Caisse centrale.
f. Strategic Communication Policy
By specifying actions to be taken and results to be measured, the Board of Directors is adopting communications orientations aligned with its strategic
planning. Caisse centrale has also adopted internal and external communication policies in order to better monitor its relations with the caisses and their
members and shareholders, its employees, the subsidiaries and their clients, socio-economic and community organizations, opinion makers, the public,
the media, the rating agencies and the various levels of government. In view of the regulatory requirements for continuous disclosure dictated by the
Canadian Securities Administrators, the Fédération adopted a strategic plan for Group-wide communications to oversee, in particular, the disclosure
of financial information and material changes that could affect the financial condition of Desjardins Group and its components.
Caisse centrale uses different channels to communicate effectively with its various stakeholders, including the annual general meetings, the
disclosure of Caisse centrale’s quarterly financial results, periodic communication with the Desjardins network, a toll-free telephone line, the Web
site and the confidential whistle-blowing procedure for actions contrary to the Code of Ethics and Professional Conduct, the specific rules and
regulatory oversight rules.
Caisse centrale also has contacts at international rating agencies in conjunction with Desjardins Group; it also communicates with the various levels
of government through Desjardins Group’s Government Relations Department.
2) Composition of the Board of Directors
The Board of Directors of Caisse centrale is composed of 22 members, a majority of whom are unrelated parties and whose designation criteria are listed
in Section 3. Within the context of Desjardins Group’s single management structure, they are the same directors as those of the Fédération des caisses
Desjardins du Québec.
The Vice-Presidents of the Councils of Representatives of the Abitibi-Témiscamingue-Nord et Ouest du Québec and of the Bas-Saint-Laurent-Gaspésie-Îles-
de-la-Madeleine regions also attend meetings of the Board of Directors in their capacity as Managing Directors.
3) Applying the Definition of Unrelated Party
There are five related Directors on the Board of Directors; namely the Chairman of the Board and Chief Executive Officer of Caisse centrale and the four
Caisse General Managers who serve on the Board. The first is related because he is a member of Caisse centrale’s Management and the other four,
because they are employed by enterprises within the Group, namely by individual caisses. In addition, the Directors have no business or personal
relationships with members of the Management Committee of Caisse centrale, or interests which, in the opinion of the Board, could significantly interfere
with their ability to act in the best interests of Caisse centrale and Desjardins Group, or any interests which, again in the opinion of the Board, could
reasonably be perceived as such.
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For guidance in these matters, the Board refers to the provisions of the Code of Ethics and Professional Conduct, which governs the actions of its
Directors and the declarations of interest filed annually by the Directors.
The list of Directors with their status (related or unrelated) appears on page 96 of this Annual Report.
It should be noted that a study of the Directors’ declarations of interest shows that they focus on their role and responsibilities with Desjardins Group
since none of them serve on the board of any other large corporation. In general, they are directors of one or two non-profit organizations.
4) Nomination Procedure
Given the cooperative structure of Caisse centrale and the principle of delegation which prevails within it, the Board of Directors of Caisse centrale is
comprised of persons elected by the delegates of the Fédération’s member caisses, who at meetings in each region or at meetings of group caisses
directly elect 17 of the 22 members of the Board of Directors. They assume the chairmanship of the Councils of Representatives. The Councils of
Representatives are democratically elected entities of the Fédération and Caisse centrale which are responsible for making decisions in each region or
for the system of group caisses with regard to adopting the regional business plan, granting sponsorships and donations, and designating the
representatives of Desjardins with outside regional agencies.
Thus, it is the caisse delegates who must choose from among the interested candidates, those who are most apt to assume two roles, namely, that
of Director of Caisse centrale and Desjardins Group as a whole and that of regional representative.
Once nominated, candidates are reminded of the responsibilities of the position of chairman of a Council of Representatives. Because they are at the
same time officers of a caisse, members of their Councils of Representatives and members of the Board of Directors of Caisse centrale, Caisse centrale
benefits from Directors with a profound knowledge of the activities of Desjardins Group who are nonetheless independent of Management. This in-depth
knowledge of the organization’s activities is a significant advantage resulting from the cooperative structure.
It should be noted that the chairs of the Councils of Representatives are also responsible for ensuring that the orientations, as defined by the Board,
are understood by the caisses and that the channels for providing support and consulting services are effective, as well as for communicating to the
Board the concerns of the caisses they represent. The dynamism and the involvement of the officers of the caisses create a healthy tension that requires
members of the Board of Directors to make decisions for the common good of the members and other stakeholders of Desjardins Group.
The four remaining positions filled by caisse general managers are determined at an election held at a meeting of representatives of Caisse centrale,
and the final position is reserved for the Chairman of the Board and Chief Executive Officer of Desjardins Group. Consequently, the Corporate
Governance Commission is not involved in the selection of the directors of Caisse centrale.
The electoral process for the Caisse centrale’s Directors itself therefore ensures the independence of the members of the Board of Directors vis-à-vis
the Chairman of the Board and Chief Executive Officer of Caisse centrale and Desjardins Group, who has no say in their selection. Furthermore, the
rules concerning the composition of the Board of Directors promote otherwise a stability and continuity for the corporate governance of Caisse centrale
because the term of office of its members is three years and is renewable, and the tenure of a third of the members ends each year. Consequently,
Directors have the time to gain a deeper understanding of files and to make a valid contribution.
The composition of the Board of Directors is balanced not only by the presence of representatives from all the regions of Québec, from the group caisses
and from Ontario credit unions, but also by the sum of the skills and experience that it contains (among others, accountants, lawyers, notaries, managers,
professional mediator, university professor of management, contractor and caisse general managers).
In 2006, all processes, terms, conditions and requirements concerning these responsibilities were set out in a guide, which was made available to caisse
officers in order to support those persons interested in seeking nomination and to assist those who are called upon to select the officers of the Fédération
and Caisse centrale.
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5) Assessing the Effectiveness of Structures
The Board of Directors, and its commissions and committees annually assess their performance by using quantifiable objectives set by the Board at the
beginning of the year. Areas for improvement and points requiring further examination, as determined by the assessment exercise, are included in an
action plan recommended to the Board of Directors by the Corporate Governance Commission, which is in charge of monitoring this plan. The Board
receives a progress report in mid-year. In addition, the assessment program for the various bodies making up Caisse centrale provides for an individual
self-assessment procedure followed by a separate meeting with the Chairman of the Board. In 2006, the Chairman of the Board individually met with
ten members of the Board. The Chairman of the Board is responsible for the assessment process, while the Corporate Governance Commission ensures
its supervision.
6) Orientation and Training Program for New Directors
Caisse centrale offers its Directors orientation and ongoing training, and develops training sessions tailored to their specific needs.
In 2006, as part of the ongoing training program, members of the Board of Directors were able to learn more about the dynamics of venture capital
through training entitled “Évolution et perspective de l’industrie du capital de risque” (Venture capital industry developments and outlook). They also were
briefed on securities brokerage and completed the training initiated in 2005 on integrated risk management. Board members were also given training on
Desjardins Group’s treasury function which is assumed by Caisse centrale.
All new Directors are provided with an integration session, including, in particular, a meeting with certain members of Management and a reference
manual containing all the information they need to carry out their duties. Every Director receives a document reiterating the expectations and duties of
his or her office. Orientation sessions were also held to ensure the effective integration of new members of a Board commission or committee.
As needed and upon request, meetings with specialists from Caisse centrale are also organized to help new Directors obtain a more complete picture
of the organization and of its main strategic projects.
The training program for members of the Board of Directors is incorporated into the programming of the activities of the Desjardins Cooperative Institute,
a training institute created for volunteer officers and managers of Desjardins Group. The Institute’s mission is threefold: Desjardins Awareness, Desjardins
Governance and Management, and Desjardins Innovation.
7) Size of the Board of Directors
The Board of Directors is of a size that prioritizes adequate representation of the caisses in the 17 regions in the province of Québec and in parts of
Ontario, as well as of the group caisses. Moreover, the presence of four caisse general managers aims to ensure that the orientations adopted by the
Board and their implementation are adapted to the operational reality of the caisses.
The efficient running of meetings and good discipline among the Directors themselves compensate for the relatively large number of Directors.
Furthermore, the informal meetings held periodically by the Chairman of the Board and Chief Executive Officer with the Directors increase the
effectiveness of the formal meetings.
The results of the performance review of the Board of Directors reveal the very significant relevance of these meetings. Since 2005, meetings in camera
without the Management of Caisse centrale, except for the Chairman of the Board and Chief Executive Officer whenever he was not required to
withdraw because of questions of independence, were scheduled after every meeting of the Board of Directors or of a commission or a committee.
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8) Remuneration Policy for Directors
The Board has adopted a policy for the payment of remuneration to its Directors, members of the Board of Ethics and Professional Conduct, and
members of the Councils of Representatives. Members waived any increase in their annual retainers. In fact, they decided to maintain all 2005
remuneration schedules to show their support of Desjardins Group’s productivity objectives, for which they have assumed a leadership role. This decision
will also apply to 2007.
Chairman of the Board $15,000 paid to the Fédération because it is assumed by
the President and Chief Executive Officer of the Group
Annual retainer for the Chair of a commission1 $6,500
Annual retainer for a member of the Board 2 $6,670
Attendance allowance for a Board meeting3 $1,000 (maximum per day)
Attendance allowance for a commission or $500 (per half-day)
committee meeting
Teleconference $200
Attendance allowance for members of the Board $1,500 for the President
of Ethics and Professional Conduct $750 for members
Moreover, in accordance with the Act respecting financial services cooperatives, the aggregate budget envelope for the payment of attendance
allowances for members of the Board of Directors and the Board of Ethics and Professional Conduct is authorized at the General Meeting of
Caisse centrale. Not only the attendance allowances, but in fact the total remuneration budget is approved at the General Meeting, to which a report
is submitted annually on changes in such remuneration.
9) Composition of Commissions and Committees
The Board of Directors has created and defined the mandate of a number of commissions and committees necessary to support it in discharging its
orientation, planning, control and monitoring responsibilities and streamline its activities. These commissions and committees are comprised entirely
or almost entirely of unrelated parties. The mandate of these commissions and committees is reviewed annually.
10) Responsibility for Corporate Governance
The Board of Directors has entrusted the Corporate Governance Commission with the responsibility of applying and updating the corporate governance
program in light of new industry trends; the commission reports its observations and makes recommendations to the Board of Directors.
11) Defining the Authority of the Management Committee
The responsibilities of the Chairman of the Board and Chief Executive Officer of Caisse centrale are set out in the internal management by-law of
Caisse centrale. The responsibilities of the President and Chief Operating Officer are also defined in this by-law. In addition, the Board of Directors has
set out in writing a very clear division of responsibilities between the Board of Directors and the Management Committee, which it seeks in fact to
optimize in order to enhance the effectiveness of corporate governance.
The annual objectives of the Chairman of the Board and Chief Executive Officer are recommended to the Board of Directors by the Committee on
the Aggregate Remuneration of the President and Chief Executive Officer of Desjardins Group (the “CAR”). The objectives of the President and
Chief Operating Officer are established by the President and Chief Executive Officer as part of the incentive plan of Caisse centrale. The Board of Directors
has developed guidelines for setting objectives to ensure sound management and an equitable application of incentive plans for all Desjardins Group
components.
1 For commissions which meet less than four times, the attendance allowance is doubled and replaces the annual retainer. 2 As for the four general managers who are members of the Board of Directors, the policy stipulates that the Board of Directors for their caisse is responsible for deciding if they are to keep all their
remuneration.3 Regardless of the number of Board, commission or committee meetings held on the same day, the maximum daily retainer is $1,000 because every effort is made to concentrate meetings in a single day
to keep costs down as much as possible.
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The degree to which these objectives are achieved is measured through an annual review process. With respect to the performance of the Chairman
of the Board and Chief Executive Officer, under the supervision of the Committee on the Aggregate Remuneration of the President and Chief Executive
Officer of Desjardins Group, each Director participates anonymously in the review process, without members of Management being present, using
a model prepared in advance by this committee.
12) The Board’s Independence from the Management Committee
The Board of Directors has created various structures and procedures to safeguard its independence from Caisse centrale’s Management. These include:
(a) having only one member of Management on the Board of Directors of Caisse centrale who is also an officer elected by representatives of members
(the Chairman of the Board and Chief Executive Officer of Caisse centrale);
(b) the creation, at the General Meeting, of the position of Vice-Chair of the Board of Directors, whose incumbent presides over Board meetings when
the items of business being discussed require the withdrawal of the Chairman of the Board and Chief Executive Officer. The internal management
by-law provides that the Vice-Chair of the Board shall replace the Chairman of the Board if he cannot act;
(c)periodic, informal meetings of the Directors, of which the Chairman of the Board and Chief Executive Officer informs the President and Chief
Operating Officer, who is not present at such meetings. Both related and unrelated Directors, however, are present at these meetings as the discussions
pertain to matters that do not bear any risk of conflicts of interest for the related Directors;
(d) meetings in camera, without Management being present (except for the Chairman of the Board and Chief Executive Officer), at the end of each
meeting of the Board of Directors. The same applies to Board commissions;
(e) having an unrelated Director chair the Audit Commission and the Credit and Investment Commission; and
(f) entrusting to the Corporate Governance Commission (of which only one member is a related party) the responsibility for:
1) managing relations between the Board and the Management Committee of Caisse centrale; and
2) ensuring that the Board of Directors fulfills its duties. In addition, the Chairman of the Board and Chief Executive Officer is assigned the responsibility
of setting or supervising the agenda for meetings of the Board, and of its commissions and committees.
g) ensuring that the members of the Human Resources Commission and the Committee on the Aggregate Remuneration of the President and Chief
Executive Officer of Desjardins Group are seconded by an external consultant with respect to matters dealing with the aggregate remuneration of
officers. Note also that Caisse centrale has a Board of Ethics and Professional Conduct whose members are elected at the General Meeting. Its
members are all independent from senior management and the Board of Directors.
13) Audit Commission – Mandate and Composition
The Audit Commission, established under the Act respecting financial services cooperatives, acts as an audit committee for Caisse centrale. It is composed
entirely of unrelated Directors; three of them, including the Commission Chair, have accounting or financial expertise.
The roles and responsibilities of the Commission have been defined in such a way as to give its members a very clear understanding of their oversight
duties. The Audit Commission has all the powers and information it needs to fulfill its mandate. The Commission reviews all financial information and
oversees the implementation of an effective control process and the required accountability. It has direct communication channels with the persons
responsible for the audit as well as with the external auditors to discuss and review certain issues, if any. The Commission may, as needed, discuss these
issues with them without the managers responsible being present.
14) Hiring Outside Advisors
A Director may engage the services of an outside advisor at the expense of Caisse centrale. However, to ensure that such services are relevant, a request
must be submitted to the Corporate Governance Commission.
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MANDATES AND COMPOSITION OF THE COMMISSIONS, COMMITTEES AND BOARD OF ETHICS ANDPROFESSIONAL CONDUCT OF CAISSE CENTRALE AS AT DECEMBER 31, 2006
Note: * means an unrelated person **means a Managing Director
EXECUTIVE COMMITTEE (COMPOSED OF 7 DIRECTORS)
This committee has the same functions and powers as the Board of Directors, with the exception of those which the Board may reserve for itself or assignto another committee or commission. Its mandate was drawn up by the Board of Directors. In 2006, it met once.
Members:Alban D’Amours, Chairman of the BoardPierre Tardif, Vice-Chair of the Board*André Lachapelle, Secretary of the Board*André Gagné*Daniel Lafontaine* (1)
Marcel Lauzon* (1)
Clément Samson * (1)
(1) Commenced their term of office at the end of March 2006. Jacques Baril* and Denis Paré* served until March 2006.
AUDIT COMMISSION (COMPOSED OF 5 DIRECTORS)
This commission supports the Board of Directors in its oversight and control responsibilities for Caisse centrale, and it examines in detail all elementsrelated to financial reporting. It met seven times in 2006.
Members :Andrée Lafortune, FCA, Chair*Thomas Blais*(1)
Pierre Leblanc, FCA*Serge Tourangeau*(1)
Benoît Turcotte*(1)
(1) Commenced their term of office at the end of March 2006. Jean-Guy Bureau and Marcel Lauzon served until March 2006.
RISK MANAGEMENT COMMISSION (COMPOSED OF 5 DIRECTORS)
This commission assists the Board of Directors in identifying and monitoring major risk exposures of Caisse centrale. It met five times in 2006.
Members :André Lachapelle, Chair*Pierre Tardif, Vice-Chair of the Board*Raymond Gagné*Norman Grant**(1)
Pierre Grenon*
Andrée Lafortune sits on the Commission as an observer.
(1) Commenced his term of office at the end of March 2006. Thomas Blais served until March 2006.C
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HUMAN RESOURCES COMMISSION (COMPOSED OF 5 DIRECTORS)
This commission has as its mandate the periodic review of the positioning of the aggregate remuneration system of Caisse centrale in order to enableCaisse centrale to maintain a competitive position in the market. It ensures that the remuneration practices in effect comply with Desjardins Group’spolicies and guiding principles. The mandate of this commission excludes the examination of issues concerning the conditions of employment of theChairman of the Board and Chief Executive Officer. It met seven times in 2006.
Members :Alban D’Amours, Chairman of the BoardPierre Tardif, Vice-Chair of the Board*André Lachapelle, Secretary of the Board*Raymond Gagné*Denis Paré*
CORPORATE GOVERNANCE COMMISSION (COMPOSED OF 5 DIRECTORS)
This commission is mandated to support the Board of Directors in applying and updating the corporate governance program. It is also responsible formonitoring the performance review program for members of the Board of Directors and its commissions and committees and the implementation of the sustainable development policy and the policy on the exercise of voting rights. The Corporate Governance Commission met five times in 2006.
Members :Alban D’Amours, Chairman of the BoardAndré Gagné*Pierre Leblanc*Daniel Mercier*Sylvie St-Pierre Babin**
CREDIT AND INVESTMENT COMMISSION (COMPOSED OF 5 DIRECTORS)
This commission is mandated to support the Board of Directors in establishing and monitoring investment policies. It met 15 times in 2006.
The Credit and Investment Commission is responsible for determining the loans to be granted by Caisse centrale as well as its investments and borrowingsand other financial commitments and, to this end, operates within the approval limits set out in the general policies adopted from time to time by theBoard of Directors.
The President and Chief Operating Officer of Caisse centrale as well as its Senior Executive Vice-President and its Senior Vice-President, Integrated RiskManagement, serve on the Commission as non-voting members.
Members :Jacques Baril, Chair*Laurier Boudreault(1)
Louise CharbonneauAlain Dumas(2)
Daniel Lafontaine
(1) Commenced his term of office at the end of March 2006.(2) Commenced his term of office at the end of January 2006.
BOARD OF ETHICS AND PROFESSIONAL CONDUCT (COMPOSED OF 3 ELECTED OFFICERS)
In accordance with the Act, Caisse centrale has a Board of Ethics and Professional Conduct that is independent of the Board of Directors and whosemembers are elected officers of Desjardins Group. It held eight meetings in 2006.
The role of the Board of Ethics and Professional Conduct is to adopt the rules of conduct applicable to the officers and employees of Caisse centrale,present them for approval to the Board of Directors and ensure that they are complied with, support Caisse centrale in applying the rules of conduct,issue opinions, make observations and recommendations with respect to ethical and professional conduct issues, especially in cases of misconduct, and notify the Board of Directors thereof.
Members :Denis Rousseau, Chair*Dominique Arseneault*(1)
Jacques Sansoucy*
(1) Commenced term of office at the end of March 2006. Claude Leblond served until March 2006.
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ATTENDANCE OF DIRECTORS AT MEETINGS OF THE BOARD OF DIRECTORS
The following table shows the attendance of the Directors of Caisse centrale at Board meetings throughout 2006.
Name Board Meetings Attended Name Board Meetings Attended
Baril, Jacques 12/12 Lafontaine, Daniel 12/12Blais, Thomas 12/12 Lafortune, Andrée 11/12Boudreault, Laurier 9/9 Lauzon, Marcel 12/12Bureau, Jean-Guy 3/3 Lavoie, Olivier 3/3Chamberland, Serge * 9/9 Leblanc, Pierre 12/12Charbonneau, Louise 11/12 Mercier, Daniel 11/12D’Amours, Alban 12/12 Paré, Denis 12/12Dumas, Alain 12/12 Roy, Michel 12/12Gagné, André 12/12 Samson, Clément 12/12Gagné, Raymond 11/12 Tardif, Pierre 12/12Grenon, Pierre 12/12 Tourangeau, Serge * 9/9Lachapelle, André 11/12 Turcotte, Benoît 12/12
* Replaced Jean-Guy Bureau and Olivier Lavoie.
The absences of the directors were due to professional duties or to the illness of relatives. In addition, when they are absent, the chairs of the Councils of Representatives are replaced by the vice-chairs in the capacity of Managing Directors, thus assuring a continuous presence of the region.
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BOARD OF DIRECTORS 1
Alban d’AmoursPresident and Chief Executive Officer
Desjardins Group
Pierre Tardif2
Vice-Chair of the BoardPresident
Council of RepresentativesRive-Sud de Montréal
André Lachapelle2
Secretary of the BoardPresident
Council of Representatives Lanaudière
Jacques Baril2
PresidentCouncil of RepresentativesEst de Montréal
Thomas Blais2
PresidentCouncil of Representativescaisses populaires de l’Ontario
Laurier BoudreaultDirecteur général de caisse
Conseil des représentants –Québec- Ouest, Rive-Sud
Serges Chamberland2
PrésidentConseil des représentants –Saguenay-Lac St-Jean, Charlevoix,Côte Nord
Louise CharbonneauGeneral Caisse Manager
Council of RepresentativesEst de Montréal
Alain DumasGeneral Caisse Manager
Council of RepresentativesMauricie
André Gagné2
PresidentCouncil of RepresentativesQuébec-Est
Raymond Gagné2
PresidentCouncil of RepresentativesBas St-Laurent, Gaspésie etÎles-de-la-Madeleine
Pierre Grenon2
PresidentCouncil of RepresentativesRichelieu-Yamaska
Daniel LafontaineGeneral Caisse Manager
Council of RepresentativesCentre du Québec
Andrée Lafortune2
PresidentCouncil of RepresentativesOuest de Montréal
Marcel Lauzon2
PresidentCouncil of RepresentativesLaval-Laurentides
Pierre Leblanc2
PresidentCouncil of RepresentativesMauricie
Daniel Mercier2
PresidentCouncil of RepresentativesCentre du Québec
Denis Paré2
PresidentCouncil of RepresentativesEstrie
Michel Roy2
PresidentCouncil of RepresentativesKamouraska-Chaudière-Appalaches
Clément Samson2
PresidentCouncil of RepresentativesQuébec Ouest, Rive-Sud
Serge Tourangeau2
PrésidentConseil des représentants –caisses de groupes
Benoît Turcotte2
PresidentCouncil of RepresentativesAbitibi-Témiscamingue, Nord et Ouest-du-Québec
1 As at December 31, 20052 Unrelated director
Norman Grant2
Vice-PresidentCouncil of RepresentativesBas Saint-Laurent, Gaspésie et Îles-de-la-Madeleine
Sylvie St-Pierre Babin2
Vice-PresidentCouncil of RepresentativeAbitibi-Témiscamingue, Nord et Ouest-du-Québec
MANAGING DIRECTORS
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• Fédération des caisses Desjardins du Québecand their caisses
• Fédération des caisses populaires de l’Ontario Inc.
• Fédération des caisses populaires duManitoba Inc.
• Fédération des caisses populaires acadiennes Ltd
• Desjardins General Insurance Group
• Desjardins Financial Security
• Desjardins Trust Inc.
MEMBERS
• PricewaterhouseCoopers LLPMontreal, Quebec
AUDITOR
Alban d’AmoursChairman of the Board andChief Executive Officer
Jean-Guy LangelierPresident andChief Operating Officer
André BellefeuilleSenior Executive Vice President
Jacques DescôteauxSenior Vice PresidentTreasury of Desjardins Group
Huu Trung NguyenSenior Vice PresidentFinance, Strategic Alliances and International
Michel ParadisSenior Vice PresidentIntegrated Risk Management
Christian St-ArnaudSenior Vice PresidentFinancing and Banking Services
OFFICERS
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98 GENERAL INFORMATION
Head Office1170 Peel StreetSuite 600Montreal, Quebec, CanadaH3B 0B1Telephone: 514-281-7070Facsimile: 514-281-7083Internet address: http://www.desjardins.com/ccd
Toronto Office365 Bay Street, Suite 300Toronto, Ontario, CanadaM5H 2V1Telephone: 416-599-0381Facsimile: 416-599-5172
OTHER INFORMATION
DESJARDINS BANK N.A.
Hallandale Branch1001 East Hallandale Beach Blvd.Hallandale, Florida, USA33009-4429Telephone: 954-454-1001Facsimile: 954-457-7927
Pompano Beach Branch2741 East Atlantic Blvd.Pompano Beach, Florida, USA33062Telephone: 954-785-7110Facsimile: 954-785-2115
Lauderhill Branch7329 West Oaklank Park Blvd.Lauderhill, Florida, USA33319Telephone: 954-578-7328Facsimile: 954-578-7325
Caisse centrale Desjardins U.S. Branch1001 East Hallandale Beach Blvd.Suite 200Hallandale Beach, Florida U.S.A. 33009-4429Tel.: 954-456-4520Facsimile: 954-458-9529
BRANCHES OUTSIDE CANADA
Estrie1845 King Street WestSuite 110Sherbrooke, QuebecJ1J 2E4Telephone: 819-821-3220 [230]Telephone: 1 800 481-3220 [230]
Outaouais880 de la Carrière Blvd.Suite 100Gatineau, QuebecJ8Y 6T5Telephone: 819-778-1400 [455]Telephone: 1 877 441-1400 [455]
Quebec City 5600 des Galeries Blvd.Suite 140Quebec City, QuebecG2K 2H6Telephone: 1 866 634-1881
Saint-Lambert2051 Victoria StreetSaint-Lambert, QuebecJ4S 1H1Telephone: 450-672-4116
Saguenay/Lac St-Jean1700 Talbot Blvd.Suite 200Saguenay, QuebecG7H 7Z4Telephone: 418-696-1712
REGIONAL OFFICES
Montreal300 Léo Pariseau StreetSuite 1810Montreal, QuebecH2W 2P4Telephone: 1 800 707-2305
Quebec City5600 des Galeries Blvd.Suite 140Quebec City, QuebecG2K 2H6Telephone: 1 866 634-5775
Trois-Rivières2000 des Récollets Blvd.P.O. Box 1000Trois-Rivières, QuebecG9A 5K3Telephone: 819-374-3594 [202]
DESJARDINS INTERNATIONAL SERVICE CENTERS
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99FINANCIAL GLOSSARY
Acceptance and Customers’ Liability under AcceptancesShort-term debt securities traded on the money market which Caisse centrale guarantees on behalf of a borrower and for which the borrower pays a stamping fee.
Asset under AdministrationAsset owned by certain members federations and managed by Caisse centrale. These assets are not the property of Caisse centrale and therefore are not reported in the consolidated balance sheet.
Basis PointUnit of measure equal to one one-hundredth of one percent.
Commitment to Extend CreditCredit facility available to customers either in the form of loans,acceptances and other on-balance sheet financing, or through derivatives products such as guarantees and letters of credit.
Currency and Interest Rate SwapTransaction where two parties agree to exchange, over a specified period, currencies or interest flows, generally a fixed rate and a floating rate, based on a notional amount.
DerivativeA contract whose value is derived from interest rates, foreign exchangerates, or equity or commodity prices. Use of derivatives allows for thetransfer, modification, or reduction of current or expected risks, includinginterest rate, foreign exchange and other market risks. The most commontypes of derivatives include foreign exchange forward contracts, foreigncurrency and interest rate futures, forward rate agreements, and foreigncurrency and interest rate options. Derivatives can be traded either onorganized exchanges or through over-the-counter agreements.
Foreign Exchange Forward ContractA commitment to buy or sell a specified amount of foreign currency on or before the maturity date at a set exchange rate.
Forward Rate AgreementA type of derivative which obliges two parties to make a cash settlementat a future date for the difference between a contracted rate of interestand the current market rate, based on a notional amount. Used as ahedge, a forward rate agreement protects against future movements in market interest rates.
Guarantee and Standby Letter of CreditIrrevocable commitment that payments will be made in the event a customer cannot meet its obligations to third parties.
HedgeA risk management technique used to insulate financial results frommarket, interest rate, or foreign currency exchange risk (exposure) arisingfrom normal banking operations. The elimination or reduction of suchexposures is accomplished by establishing offsetting positions. Forexample, assets denominated in foreign currencies can be offset withliabilities in the same currencies or through the use of foreign exchangehedging instruments such as futures, options, or foreign exchangecontracts.
Interest Rate SensitivityEarning assets and interest-bearing liabilities which mature or are subjectto interest rate adjustments within a specified term or have an interestrate that floats in reference to a base interest rate.
LiquiditiesGenerally, assets in cash or in securities easily convertible to cash, such asBank of Canada deposits and securities.
Mark-to-MarketValuation at market rates, as at the balance sheet date, of securities,loans, deposits, subordinated debentures and derivatives.
Net Interest IncomeThe difference between interest income earned on assets and the interestexpense related to liabilities. The ratio of net interest income to averageassets is called the “net interest margin.”
Notional AmountThe amount used as a reference point to calculate payments for financialinstruments such as forward rate agreements or interest rate swaps. Theamount is not exchanged.
Obligation Related to Securities Sold ShortTransaction in which the seller sells securities it does not own. The sellerborrows the securities in order to deliver them to the purchaser. At a laterdate, the seller buys identical securities in the market to replace theborrowed securities.
Return on Average AssetThe ratio of net income to average total assets during a year.
Risk WeightingThe process by which weighting factors are applied to the face value ofcertain assets in order to reflect a comparable risk level. Off-balance creditinstruments and derivatives are also converted by adjusting the notionalamounts to balance sheet (or credit) equivalents and by applyingappropriate risk weighting factors. Total risk-weighted assets constitutethe denominator of the various capital ratios as prescribed by the Bank for International Settlements (BIS).
SecuritizationMechanism by which financial assets (ex.: mortgage loans) are convertedinto financial asset-backed securities. These securities are thereaftertransferred into a Trust.
Stock Index OptionThe right (as opposed to obligation) to sell (put option) or buy (call option)on or before a maturity date a specified amount of a stock index at a setprice (exercise price).
Subordinated DebentureUnsecured liability issued by Caisse centrale whose repayment, in theevent of liquidation, is subordinated to the claims of depositors andcertain other creditors.
Trading AccountLiquidities used for arbitrage transactions on financial markets. The accountis presented at market value on the balance sheet.
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On peut obtenir la version française de ce Rapport annuel sur demande.
The Senior Vice-president, Finance, Strategic Alliances and International of Caisse centrale Desjardins is responsible for the production of this Annual Report.
Graphic design: Lg2d • Production: Groupe Produlith inc. • Printing: Groupe Produlith inc.
COMMITMENT TOEVERY SINGLEMEMBER AND CLIENT
Companies nowadays are constantly seeking toimprove the quality of the services they offer theirclients. This objective is even more important in acooperative enterprise such as Desjardins, whoseclients are also, in most cases, its owners. That iswhy service quality is one of the six orientations ofDesjardins Group’s 2006-2008 Strategic Plan.
Since 2002, we have been working steadily tomake our employees aware of how important thisissue is to us. In 2006, we initiated an ongoingimprovement process that would enable us tostrengthen our position as leader in that area, so wecould offer our “millions of good reasons” servicethat meets their expectations as user-owners.
MILLIONS OF GOOD REASONSDesjardins owes its existence to the members who came together to create
their own financial institution that would provide them with the financial
products and services they needed. Since 1900, when the first Desjardins
caisse was founded in Lévis, people from many other communities have
been pooling their resources to set up hundreds more caisses. Over the
years, the caisses have generated sufficient surplus earnings to enable them
to create subsidiaries to meet the increasingly diversified needs of their
members. Today, Desjardins represents an inalienable collective wealth and
forms the basis of the largest cooperative financial group in Canada,
offering its millions of members an extensive range of financial products
and services.
But Desjardins, like the caisses that created it, is more than just a financial
institution. Because of its cooperative nature, it takes an active part in the
economic and social development of the communities in which it operates.
That is why, year after year, the caisses give back a large portion of their
surplus earnings to their members and the community. And it is for the
same reasons that the caisses and their subsidiaries develop and promote
distinctive commercial practices that turn their cooperative values into
concrete action. In other words, Desjardins demonstrates an unparalleled
commitment to the communities it serves.
DESJARDINS, THE LARGESTCOOPERATIVE FINANCIAL GROUP IN CANADA
n Assets of $ 135.1 billion.
n More than 5.7 million members in Québec and Ontario, including over
400,000 business members, close to 40,000 dedicated employees, and nearly
7,000 committed elected officers.
n 1,439 points of service in Québec and Ontario: 549 caisses and 890 service centres.
n 113 points of service in Manitoba and New Brunswick: 40 affiliated caisses and
73 service centres.
n 53 Business Centres in Québec and 3 in Ontario.
n 32 Desjardins Credit Union points of service in Ontario.
n Approximately 20 companies offering a wide range of financial services, with many
of them active in several Canadian provinces.
n A state-of-the-art virtual network on automated teller machines and the Internet.
CAISSE CENTRALE DESJARDINS ISDESJARDINS GROUP'S TREASURER
n Nearly $ 18 billion in assets.
n $ 118 billion in derivatives.
n Funding programs of $ 15 billion in Canada and other parts of the globe.
n Borrowings on the Canadian money market (no upper limit).
n Authorized credits nearly $ 10 billion for businesses and public sector institutions.
n Business offices in Québec and Ontario.
n One U.S. retail Banking subsidiary.
n One U.S. Branch for corporate loans.
n A network of banking correspondents on every continent.
n First-class credit ratings.
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MILLIONS OF GOOD REASONS
2006 ANNUAL REPORT
REFLECTING OUR COMMUNITIES
The communities currently served by Desjardins, as well as those in which it hopes to broaden their presence, are becomingincreasingly diversified. The position of women, young people and cultural communities in our society today is very differentfrom their status in 1900, when the first caisse was founded in Lévis.
Desjardins has always proven its ability to adapt to change, both as financial institutions and as instruments of communitydevelopment. That is why, as our most recent advertising campaign shows, we want to further embrace this diversity byvaluing people’s differences and by welcoming them.
We believe that embracing diversity can only be a positive thing, both for Desjardins and for its members, clients, officers and employees. This is why, throughout all our components, we seek to uphold and even strengthen this attitude, which willenable us to warmly welcome all our members and, in so doing, help us become an accurate reflection of the society inwhich we live today.
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