Management's Discussion and Analysis - Coast Capital Savings 2017 ...
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Management’s Discussion and Analysis The Management’s Discussion and Analysis (“MD&A”) section of the Annual Report provides an overview of Coast Capital’s operations and financial position. The MD&A also includes a discussion on risk management and an analysis of our capital structure. The information provided demonstrates our commitment to balancing strong financial performance with delivery of exceptional value to our members. Our decision-making model takes both into account so that we can continue to improve the financial well-being of our members while supporting the communities in which we work and live. This section is current as of February 27, 2017, and should be read with the audited consolidated financial statements, which are prepared according to the International Financial and Reporting Standards (IFRS). Table of Contents About Forward-Looking Statements 10 About Coast Capital Savings Credit Union 11 2016 Highlights 11 Our 2017 Goals 11 Economic Environment in 2016 12 Economic Outlook for 2017 13 Our Lines of Business 14 Retail Banking 14 Commercial Banking 14 Financial Performance 16 Net Interest Income 16 Fees, Commission and Other Income 18 Non-Interest Expenses 18 2016 Capital Expenditures 19 Loan Portfolio 19 Provision for Credit Losses 20 Capital Management 21 Regulatory Capital Requirements 21 Maintaining a Sustainable Level of Regulatory Capital 22 Risk Management 23 Overview 23 Risk Culture 23 Risk Appetite 24 Risk Inventory 24 Risk Principles 24 Risk Governance and Management 25 Risk Identification and Assessment 26 Risk Measurement 26 Monitoring Capital Adequacy Risk 26 Risk Information Specific to Our Financial Reporting 26 Internal Controls over Financial Reporting and Disclosures 29 Critical Accounting Estimates 29 Allowance for Credit Losses 29 Financial Instruments Measured at Fair Value 29 Asset Impairment (Goodwill and Intangible Assets) 30 Contingent Liabilities 30 Income Taxes 30 About Forward-Looking Statements This Annual Report contains forward-looking statements about our operations, goals and expected financial performance. These statements are subject to risks and uncertainties that may affect results, including changes in the legislative or regulatory environment, interest rates, and general economic conditions in B.C. and Canada (among others). Readers should give careful consideration to these issues and not rely too heavily on our forward-looking statements. 10 Coast Capital Savings Credit Union
Management’s Discussion and Analysis
About Coast Capital Savings Credit Union
We are Canada’s second-largest credit union by assets and the largest based on our membership of 543,000. We serve
members across B.C. through our online and mobile platforms, contact centre, and 52 branches located in Metro
Vancouver, Fraser Valley, Vancouver Island and the Okanagan.
We are owned by our members
• As a credit union, our members, and their financial well-being, come first. Unlike the banks, our decisions are not
driven by shareholder profits.
• We are dedicated to serving everyday Canadian families and local small businesses
• Our membership has grown consistently over the past 10 years because we offer a better banking experience,
along with innovative and competitive products. In 2016, we welcomed over 20,000 new members.
Our Mission and Value Proposition
Our mission is to provide Simple financial help to everyday Canadians. Our value proposition rests on helping
members maximize their financial well-being, with a focus on delivering superior service. We know that in helping
our members better manage, save, protect and grow their money, we can reduce the stress that comes with financial
decisions and help them take control of their finances.
Financial Sustainability
Our performance is based on more than just our financial results. At the same time, maintaining a strong financial
foundation is fundamental to our ability to deliver on our mission. Through sustainable earnings and prudent risk
management, we are able to invest in financial innovations that offer the best products and service experience to our
members. Maintaining a strong financial position also supports our ability to meet our employee commitments and to
contribute to the communities in which we operate.
2016 Highlights
• We invested in our digital channel capabilities to improve mobile services and convenience for our members
including Deposit On-the-go and Coast Online Banking for Small Business
• Believing that Canadians from coast to coast would find our value proposition attractive, we asked our members
if they agreed. Almost 80 per cent voted in favour of a Special Resolution allowing us to go national.
• As part of our ongoing technology upgrades, we converted our contact centre platform to the latest software to
provide faster routing of members to the employees best equipped to provide assistance
• We ventured into new markets in B.C., opening a branch in Kelowna that marked the first expansion in our history
outside of our traditional branch footprint. Our move into the Okanagan allows us to build new relationships in
this important region. We also opened a new branch in Courtenay, bringing our total branch count to 52. The
unique design of our two new branches includes innovative features to support financial fitness goals, such as a
Help Lab where staff work with members on an action plan for success.
Our 2017 Goals
In 2017 we will continue to focus on improving the financial well-being of our members through Simple financial help.
Key initiatives include:
1. Expansion of our digital service offering with new services and greater online functionality, providing intuitive and
interactive tools to members. In 2017, for the first time, it will be possible to complete the entire new membership
opening process using a mobile phone. We will also launch electronic member statements, providing a cleaner,
faster method of reporting to our members.
2. Re-engineering of the end-to-end processes that have the biggest impact on our members’ experience, such as
our lending and investment processes. Our goal is to improve our speed and turnaround times to provide a truly
differentiated and superior experience to our members.
3. Deepening relationships with existing members by working with them to explore ways that we can help them
improve and take control of their finances.
4. Building out the details of our national expansion plan. This will involve extensive work with federal and provincial
regulators to support our transition from a provincially regulated credit union to a federal credit union.
2016 Annual Report 11Management’s Discussion and Analysis Economic Environment in 2016 Economic growth in most major global economies slowed in 2016, despite low interest rates and favourable energy prices. U.S. real GDP growth in 2016 was disappointing at 1.6 per cent, attributed to reduced levels of business investment. Solid spending by U.S. consumers, along with residential construction activity, took up some of the slack in the U.S. economy, supported by increased employment levels and low interest rates. The U.K.’s Brexit vote to leave the European Union received a sharp, initial negative response in financial markets, followed by an equally quick rebound. The actual Brexit process, initiated in 2016, will continue to unfold over time, with potential impacts on trade and economic activity in 2017 and beyond. The election of President Donald Trump added to the global political and economic uncertainty at the end of 2016. Canadian real GDP growth in 2016 was subdued at 1.3 per cent, weighed down by poor performance in provinces most heavily dependent on energy production. In addition to low oil prices, economic growth in Alberta was impaired by a slow down in oil production caused by wildfires in Q2. In response to these headwinds, the Bank of Canada maintained its low interest rate policy throughout the year, which reduced the attractiveness of the Canadian dollar. Despite the Canadian dollar trending at low levels, manufacturing and export activity remained slow in 2016 due to sluggishness in the U.S. economy. On the positive side, low and stable interest rates created favourable conditions for consumer spending during the year, supported also by consumer net worth increases from rising home values. The Canadian residential real estate market had a great year in 2016 overall, with sales hitting record levels driving home prices upwards. In Q4, the federal government announced new mortgage regulations in an effort to cool housing markets and support long-term stability. B.C.’s real GDP grew at a very healthy 3.3 per cent in 2016, following similarly strong growth results in 2015. B.C’s economic growth was the highest among all Canadian provinces in both years. The booming housing market was the leading story behind this growth, supported by competitively priced exports and a healthy labour market. Rising house prices and job growth bolstered consumer confidence, translating into strong household spending. The downside to the housing market included affordability issues and correction concerns. Impact on Us Robust housing market activity in 2016 underpinned the strong growth in our residential mortgage and commercial construction mortgage portfolios. Low interest rates increased affordability for members, stimulating household spending. However, first-time homebuyers did not feel the full benefits of the low rates, as these were offset by higher house prices. Low interest rates also translated into lower member loan delinquency rates during the year, reducing loan loss provisioning requirements on our retail portfolio. At the same time, rising personal debt levels increased member sensitivity to possible future interest rate increases. The low Canadian dollar throughout the year constrained foreign currency transaction volumes and related foreign exchange revenue growth. Volatile equity markets at the start of the year reduced member interest in mutual and segregated fund investments during the RRSP season. Sales volumes and fund assets under administration growth improved as financial markets recovered later in the year. 12 Coast Capital Savings Credit Union
Management’s Discussion and Analysis
Economic Outlook for 2017
Expectations for economic growth and activity in 2017 depend largely on how major events and changes that
came to light in 2016 may play out. Notable global events include the Brexit vote, starting the process towards the
U.K.’s withdrawal from the European Union, the election of Donald Trump as President of the United States, and the
OPEC agreement to scale back oil production beginning in 2017. While some of the major developments influencing
economic activity in 2017 are well known, there is a heightened sense of uncertainty as to what the nature and extent
of the impacts will be.
Global real GDP growth is expected to be slightly higher in 2017 at 3.4 per cent, compared to 3.1 per cent in 2016.
Global interest rates are forecasted to rise slightly, but remain at historically low levels. Continued low interest rates,
combined with government fiscal stimulus efforts, will support overall global growth. Emerging economies, led by
China, are expected to see lower growth. China’s growth is forecast at 6.2 per cent in 2017, compared to 6.6 per cent in
2016, due to softer global trade activity. OPEC’s announcement that it would reduce oil production beginning in 2017
supports a recovery in global energy markets.
After a lacklustre performance in 2016, real GDP growth in the U.S. is expected to increase from 1.6 per cent in 2016
to 2.2 per cent in 2017. Tax cuts and fiscal stimulus programs proposed by the Trump administration have to date been
received favourably by financial markets. Expected strong consumer spending, increased business investment, rising
energy prices and a labour market that is nearing full employment levels will create inflationary pressures in 2017. As a
result, U.S. interest rates are forecast to rise in 2017, putting upward pressure on the value of the U.S. dollar.
Canada’s GDP growth is expected to improve slightly in 2017 to a modest 1.8 per cent. Key drivers include higher
oil prices, increased business investment spending, continued strong consumer spending, the federal government's
fiscal stimulus plan. Residential real estate development and household spending will continue to have a favourable
impact on economic activity, but will weaken slightly in 2017. Interest rates are expected to remain low and stable
throughout the year. Uncertainty over changes to the trade relationship with the U.S. remains a concern. The value of
the Canadian dollar will be supported in 2017 by higher oil prices, but rising interest rates in the U.S. while the Bank of
Canada holds steady on rates may cause the Canadian dollar to depreciate against the U.S. dollar.
B.C.’s real GDP growth was the highest amongst Canadian provinces in both 2015 and 2016, at 2.9 per cent and 3.3
per cent, respectively. In 2017, B.C. is expected to see growth decline to 2.1 per cent. The most notable factor impacting
growth in 2017 is the expected cooling of the residential real estate market. Residential real estate activity has provided
a powerful growth engine for B.C. in recent years. Several housing policy measures implemented in 2016, including
tightening of mortgage insurance rules and a 15 per cent tax on foreign homebuyers in Metro Vancouver, are expected
to dampen home sales activity and reduce upward price pressure.
Impact on Us
For our members, a cooling off of the B.C. real estate market means house prices will stabilize in 2017 and possibly pull
back from the peak levels of 2016. Interest rates are likely to remain relatively low, benefiting members with loans, but
limiting the interest earned on deposits. While financial markets are expected to remain volatile, they continue to offer
members higher potential long-term returns on savings compared to deposits.
Reduced activity in the real estate market in 2017 will likely translate into reduced retail and commercial credit
portfolio growth, compared to the very strong growth experienced in 2016. Our leasing business, which operates
across Canada, may see higher volumes from increased business investment, especially in provinces such as Alberta.
Forecasted low interest rates will keep our net interest margins compressed. Global financial markets are difficult to
predict, but through our efforts to meet the long-term investment needs of our growing member base, we expect our
investment assets under administration to continue to grow in 2017.
2016 Annual Report 13Management’s Discussion and Analysis
Our Lines of Business
Retail Banking
Our retail banking team is dedicated to helping members with:
• Home ownership through mortgages and home equity lines of credit,
• Borrowing needs through lending products such as personal loans and lines of credit, car loans, student loans,
and credit cards,
• Day-to-day banking needs, such as chequing and savings accounts, bank drafts, wire transfers and e-transfers,
• Saving and investment needs through a variety of products and accounts including high interest savings accounts
and term deposits
• Other general banking activities such as foreign exchange transactions and safety deposit boxes
Retail members also have access to mutual and segregated fund investments and life insurance products through
our licensed sales staff. For members with more complex financial needs, we offer access to a highly accredited team
of financial planners and life insurance and estate specialists.
Our retail services are available through multiple channels providing members with a range of convenient contact
options, including 52 branch locations, a network of automated teller machines, telephone/Contact Centre and our
digital platforms (online and mobile banking). Additionally, mobile advisors are available to meet with members at
their home or work. Through all channels, our retail banking group is focused on providing Simple financial help.
In 2016, we helped our members by:
• Delivering more than 31,000 Where You’re At Money Chats. The Money Chat process helps members improve the
way they manage, save, protect and grow their money and explores how we can help them achieve their financial
goals.
• Making enhancements to our relationship management approach, allowing us to build deeper relationships with
members and gain a better understanding of their needs
• Providing Help Extras of up to $1,000 dollars to members who fund or renew mortgages with us, for deposit into
a savings or investment account that aligns with their financial goals. We funded over $7 million in Help Extras to
members in 2016.
• Enhancing our ability to deliver services when and where it is most convenient for our members, through the
expansion of our mobile mortgage and insurance teams, upgrades to our mobile banking app, and extending our
branch hours in select locations
• Expanding our branch network to new communities – Courtenay and Kelowna
• Relocating our Surrey Central City branch to our Help Headquarters location. The new branch includes design
improvements and added features to improve member service.
Looking ahead to 2017
In 2017 we will focus on deepening the relationships we have with our members while continuing to improve their
financial well-being through Simple financial help. We plan to:
• Increase member convenience by investing in digital capabilities and solutions, including e-statements and
online membership opening
• Improve access to our expert staff and innovative products by expanding our mobile teams and extending the
operating hours at our contact centre and select branches
• Continue to invest in our employees to ensure they have the skills, capabilities and tools to help members at every
life stage with straightforward and meaningful solutions
Commercial Banking Group
Our commercial banking offering is a core part of our product suite and supports our commitment to provide members
with Simple financial help. We assist commercial members through a network of commercial banking centres located
in downtown Vancouver, Richmond, Surrey, Langley, Greater Victoria, Nanaimo/Courtenay and Kelowna. Our newest
locations in Nanaimo/Courtenay and Kelowna opened in the fall of 2016 to meet the needs of the growing number of
businesses in the mid-Island and Okanagan regions.
14 Coast Capital Savings Credit UnionManagement’s Discussion and Analysis
Small Business Banking
We know small businesses need just as much help as big businesses. The Small Business Banking team is dedicated to
helping small businesses with day-to-day transactions, deposit services and securing credit facilities that provide the
right solution for the business. Our help team extends beyond our dedicated Relationship Managers. We have Business
Banking Officers embedded in our retail branches and available to help business members in person. Because we
understand that a business owner’s personal and commercial banking needs are often intertwined, we work closely
with the retail banking team in our branches to meet the full needs of members. In addition, in 2016 we launched Coast
Online Banking for Small Business. This new digital platform allows members to pay bills, make transfers, and manage
accounts for both personal and business banking, using the same login.
Business Banking
The Business Banking team is dedicated to helping larger companies with their full banking needs. Requirements for
these companies are generally more complicated and often include margined lines of credit or demand loans in excess
of $1 million. Our Business Banking professionals focus on building long-lasting relationships with members in order
to service their current and future needs.
Commercial Real Estate
We offer a one-stop financial solution in Commercial Real Estate through a wide range of full-service construction and
term lending products. We offer services for:
• Single detached and multi-family development and construction
• Retail, office, and industrial development and construction
• Land acquisitions where imminent development is scheduled
Coast Travelers Group
The Coast Travelers Group provides leasing and financing solutions for various types of commercial equipment and
autos. In cases where equipment ownership is not the best option, our team can help with a leasing plan. Coast
Travelers Group provides financing across Canada to meet a wide range of needs, from owner-operators who require
one piece of machinery to companies seeking to acquire a fleet of heavy equipment for a specific project.
Payments and Cash Management
Payments and Cash Management provides services for online business accounts through Coast Online Business
Banking, Coast Automated Funds Transfer, Merchant Services and Online Bill Payments. These services are
important to both borrowing and non-borrowing commercial members, such as Property Managers and Societies.
In 2016, our commercial membership grew to over 49,000, and our total commercial loan and lease financing assets
increased to over $3.7 billion. During the year we:
• Welcomed over 3,100 new business members and 1,600 new leasing customers
• Provided over $356 million in new lending to local small and medium-sized businesses
• Completed $1.4 billion in new real estate financing
• Provided or arranged over $461 million in new equipment/auto lease financing to customers across Canada
Looking ahead to 2017
Our focus remains the financial well-being of our commercial members. In 2017, we expect to expand our ability to
provide Simple financial help by:
• Adding Commercial team employees to the Contact Center to increase member access to our staff
• Enhancing and improving digital business banking services
• Developing more innovative business products
• Delivering a superior in-branch business banking experience, including continuing the collaboration between
commercial and retail teams to ensure that we are meeting the total banking needs of members
2016 Annual Report 15Management’s Discussion and Analysis Financial Performance Our performance is based on more than just our financial results. At the same time, sound financial results are fundamental to our ability to continually improve the services we offer and the experience we deliver to our members. Maintaining a strong financial position also supports our ability to meet our employee commitments and to contribute to the communities in which we operate. In 2016, our net income was $58.5 million, up 0.2 per cent from $58.4 million in 2015. While revenues from both net interest income and non-interest income sources were higher in 2016, this increase was more than offset by an increase in non-interest expenses. In addition to inflation and regulatory cost increases, higher costs in 2016 reflect spending related to our leasing business expansion, technology resource and infrastructure improvements, and head office and branch moves. We experienced strong growth of our balance sheet in 2016 of over $1.2 billion, bringing our total assets at year-end to just under $15.0 billion. Our asset growth was supported by strong deposit growth of almost $1.3 billion during the year, allowing us to fund a 10.8 per cent increase in our loan assets, reduce borrowings, and maintain a strong liquidity position throughout 2016. While not included on the balance sheet, our mutual and segregated fund assets under administration grew by $372.0 million (12 per cent) in 2016, to over $3.4 billion. This growth was supported by market value increases as well as sales and advice efforts of our licensed staff. Net Interest Income Net interest income is the difference between the interest earned on loans and other financial assets, and the interest paid on deposits and other funding sources. It is impacted by both the size of our balance sheet and the interest rate margin earned (margin is the difference between the rate received on loans and other assets, and the rate paid on deposits and other funding sources). The interest rates we offer on loans and deposits are managed throughout the year to ensure members have access to rates that are both fair and competitive. In 2016 our net interest income was $280.0 million, compared with $264.5 million in 2015. The $15.5 million increase is primarily attributed to strong growth of our balance sheet. Average assets in 2016 were 10 per cent higher than 2015. However, the favourable impact on net interest income from balance sheet growth was tempered by a decrease in our net interest margin. While the prime rate was steady in 2016, the impacts of two prime rate cuts in 2015 were felt throughout 2016. Our average interest rate margin in 2016 was 1.96 per cent, down 8 basis points from 2.04 per cent in 2015. The impacts of interest rate margin compression were partially mitigated in 2016 by continued growth of our higher yielding commercial loan portfolio (which increased as a proportion of the average total loan balance from 26.8 per cent in 2015 to 27.6 per cent in 2016), as well as a shift in deposit balances towards lower rate demand deposits. With interest rates at historic lows and only modest rate premiums available through longer-term deposit options, many members opted to hold deposits in chequing or savings accounts rather than in term deposits. To further manage interest expenses in 2016, while also maintaining a strong liquidity and funding position, we expanded our use of the Canada Mortgage Bond (CMB) program. This program allows us to obtain low-cost funding through a process of securitizing existing mortgages. The long-term nature of CMB program funding is especially attractive in periods of exceptionally low interest rates, as was the case in 2016. In 2016 we raised an additional $200 million in new CMB funding. 16 Coast Capital Savings Credit Union
Management’s Discussion and Analysis
Year ended December 31
in thousands of dollars 2016 2015
Average Interest Average Interest
balance Mix % Interest rate % balance Mix % Interest rate %
Cash resources $ 1,753,877 12.3 $ 22,701 1.29 $ 1,192,080 9.2 $ 20,276 1.70
Loans
Residential 8,711,960 60.9 249,580 2.86 8,261,120 63.6 252,208 3.05
Commercial 3,423,584 23.9 139,990 4.09 3,116,372 24.0 131,579 4.22
Personal 62,403 0.4 3,878 6.21 67,439 0.5 4,550 6.75
Lines of credit 170,920 1.2 12,157 7.11 181,416 1.4 13,140 7.24
Total loans $ 12,368,867 86.5 $ 405,605 3.28 $ 11,626,347 89.5 $ 401,477 3.45
Other assets 176,533 1.2 – – 175,476 1.4 – –
Total $ 14,299,277 100.0 $ 428,306 3.00 $ 12,993,903 100.0 $ 421,753 3.25
Deposits
Demand 5,835,305 40.8 23,277 0.40 5,117,493 39.4 27,085 0.53
Term 5,061,482 35.4 93,729 1.85 4,846,379 37.3 99,220 2.05
Registered plans 1,348,185 9.4 18,689 1.39 1,395,920 10.7 22,818 1.63
Total deposits $ 12,244,972 85.6 $ 135,695 1.11 $ 11,359,792 87.4 $ 149,123 1.31
Borrowings 785,260 5.5 12,927 1.65 409,297 3.1 7,757 1.90
Derivatives – – (365) – – – 397 –
Total financial liabilities $ 13,030,232 91.1 148,257 1.14 $ 11,769,089 90.6 157,277 1.34
Other liabilities 249,670 1.7 – – 256,487 2.0 – –
Class B shares 31,121 0.2 – – 32,936 0.3 – –
Accumulated other
comprehensive
income (AOCI) 8,910 0.1 – – 10,828 0.1 – –
Retained earnings 979,344 6.8 – – 924,563 7.1 – –
Total $ 14,299,277 100.0 $ 148,257 1.04 $ 12,993,903 100.0 $ 157,277 1.21
Net interest income $ 280,049 1.96 $ 264,476 2.04
2016 Annual Report 17Management’s Discussion and Analysis
Fees, Commission and Other Income
In addition to loan and deposit activities that generate net interest income, we provide our members with many
products and services that produce fee and commission revenue. These include day-to-day banking services, credit
cards, foreign exchange, life insurance, as well as mutual and segregated fund investments. These services are
important to members, helping to meet their diverse needs, while also providing income stability and diversification
to our financial operations. The fees and commissions earned on the products and services we provide are regularly
reviewed to ensure they provide our members with excellent value, while ensuring market competitive and fair returns
on the cost of delivery.
In 2016, revenue from fees, commissions and other income totalled $78.9 million, an increase of $2.2 million
compared with $76.7 million in 2015.
• While our member base and the number of products and services used by members increased in 2016, our fee
and commission revenue generated by day-to-day banking services decreased by $0.2 million compared to 2015.
This reduction reflects a shift in the transaction preferences of our members who continue to access new service
options that increase convenience while reducing the fees they pay.
• Our Where You’re At Money Chat process continues to help us deliver more “grow” and “protect” benefits to our
members. In addition, our Low-fee, More-for-me Mutual Funds®, launched in 2009, continue to offer members
some of the lowest mutual fund management expense ratios in Canada. As a result, revenues from investment
fund assets increased by $2.7 million, from $24.7 million in 2015 to $27.4 million in 2016, while insurance revenues
increased by $0.7 million, from $8.0 million in 2015 to $8.7 million in 2016.
• Foreign exchange revenues declined by $0.1 million, from $3.8 million to $3.7 million. The steady depreciation of
the Canadian dollar relative to the U.S. dollar continued in 2016, impacting our exchange volumes. Volumes were
also impacted by increased local market competition for foreign exchange business.
• Other income, which includes a broad range of items from credit card commissions to rent income, declined by
$0.9 million in 2016, compared to 2015. A reduction in leasing business fee income, tied to slower new leasing
volumes, was the main cause of the decline in other income.
Non-Interest Expenses
Non-interest expenses include all costs that are not interest-related, excluding provisions for credit losses and income
taxes. These include employee salaries and benefits, administration, occupancy, information technology, marketing,
community contributions, and other costs. We strive to manage operating costs in a diligent and fair manner, while
also recognizing their long-term impacts on member service and capital growth to support our financial sustainability.
Our 2016 non-interest expenses were $275.4 million, up $14.9 million (5.7 per cent) from $260.5 million in 2015.
Significant changes to non-interest expenses
• Employee costs, including salaries, benefits, and incentive compensation, increased by 5.2 per cent, from $133.5 million
in 2015 to $140.5 million. Factors driving this increase include market salary increases and growth in our labour force.
• Administration expenses were $74.2 million, compared to $71.9 million in 2015, up 3.2 per cent. Notable cost
increases include:
°° Loan processing costs, including costs related to securitizing mortgages, increased by $0.9 million.
°° Account administration costs, including costs related to clearing and other transactions, member statements,
and fraud, increased by $1.0 million.
°° Regulatory costs related to our Credit Union Deposit Insurance Corporation (“CUDIC”) assessment
increased to $10.2 million from $9.0 million in 2015, due to deposit growth and an increase in the base CUDIC
rate charged. Our CUDIC fee for 2016 was assessed at the base (lowest) level, reflecting our sound capital,
liquidity, profitability, and credit risk position.
• Our 2016 technology expense increased by $3.1 million over 2015, primarily due to higher depreciation costs
attributed to new contact centre technology implemented to improve our effectiveness in responding to member
inquiries and service needs.
• Occupancy expense was $32.2 million, up $1.9 million or 6.2 per cent over 2015. 2016 represented our first full year
in our new Help Headquarters building; in addition, the opening of our new Kelowna and Courtenay branches
later in the year created additional lease, maintenance and depreciation expenses.
18 Coast Capital Savings Credit UnionManagement’s Discussion and Analysis
2016 Capital Expenditures
Our 2016 capital expenditures focused on branch facilities and increased utilization of our new head office space. We
also invested in upgrading and maintaining the technology infrastructure we use to serve our members. In May, we
completed the move of our Central City branch to a new flagship location in our head office. Additionally, in November
we opened two new branches in Kelowna and Courtenay, expanding our services to these markets. Technology
investments included the launch of our upgraded contact centre software, enhancements to our mobile banking
services to provide members with our Deposit On-the-go cheque deposit capabilities, and the launch of a new Online
Banking for Small Business platform.
In 2016, our capital expenditures totalled $20.8 million, compared to $28.9 million in 2015. We expect our capital
expenditures in 2017 to be lower compared to 2016. 2017 capital expenditures will focus on enriching the digital service
experience for our members, including work to enable digital account opening, online foreign exchange transactions,
and mobile payments. As well, we will be investing in automated processes for activities such as loan approvals, to
improve the simplicity and turn-around times for our members. We will also make necessary investments to refresh
and update many of our existing branch locations.
Year ended December 31
in thousands of dollars 2016 2015
Leasehold improvements $ 10,090 $ 8,038
Computer equipment 3,480 6,270
Software 4,544 10,509
Furniture and equipment 2,702 4,041
Total $ 20,816 $ 28,858
Loan Portfolio
Total loans, including leases, increased by $1.2 billion, or 10.6 per cent, in 2016. Growth was stronger than planned
and almost 90 per cent higher than in 2015. Favourable loan growth was driven by intense activity in the retail housing
market, which impacted both retail mortgage volumes and demand for commercial construction financing. Our
leasing portfolio growth in 2016 was 30 per cent lower than 2015.
Positive growth drove our credit portfolio to new milestone levels at year-end:
• Total retail credit portfolio over $9 billion
• Commercial credit (excluding leases) over $3 billion
• Leases over $700 million.
Our retail mortgage portfolio grew $795 million, or 9.7 per cent, in 2016, one of our best years on record. In addition to
a very strong real estate market, growth in 2016 was supported by our Members Get It Mortgage offer and our
multi-channel delivery approach, including our branch network, contact centre, mobile mortgage team and external
brokers. As part of the Members Get It Mortgage offer, we also continued to offer Help Extras to mortgage members in
2016. Help Extras, up to $1,000 in value for members with new or renewing mortgages, are designed to ensure that
members with mortgages are also taking care of their other financial well-being needs. At the end of 2016, retail
mortgages accounted for 69.8 per cent of our total loan portfolio, down from 70.2 per cent at the end of 2015.
Commercial mortgages, loans, and lines of credit grew by $347 million in 2016, accounting for 23.3 per cent of our
total loan portfolio at the end of 2016, up from 22.8 per cent at the end of 2015. Commercial lending, especially to our
small business members, is a fitting expression of our values and community focus. Backed by sound underwriting
policies and practices, the commercial loan portfolio provides diversification to assist in managing overall portfolio
risk, while ensuring the potential for higher yields to strengthen our fiscal performance and support long-term
financial sustainability.
2016 Annual Report 19Management’s Discussion and Analysis
Loan portfolio
As at December 31 2016 2015
Total Average Total Average
in millions in thousands in millions in thousands
Number of dollars1 Mix % of dollars Number of dollars1 Mix % of dollars
Retail
Mortgages
Conventional 27,084 $ 4,210 $ 32.8 $ 155 30,996 $ 3,994 $ 34.3 $ 129
Revenue 3,895 1,224 9.6 314 3,373 915 7.9 271
Progressive 70 18 0.1 257 119 40 0.3 336
Insured 7,417 1,337 10.4 180 5,670 1,127 9.7 199
High-ratio 4,532 1,221 9.5 269 4,230 1,170 10.1 277
Mortgage-secured lines
of credit 18,600 957 7.4 51 17,983 926 8.0 51
Subtotal mortgages 61,598 8,967 69.8 146 62,371 8,172 70.2 131
Other
Other lines of credit 133,939 159 1.2 1 136,390 169 1.5 1
Personal loans 10,510 45 0.3 4 14,317 58 0.5 4
Subtotal other 144,449 204 1.5 1 150,707 227 2.0 2
Subtotal retail 206,047 9,171 71.1 45 213,078 8,399 72.2 39
Commercial
Commercial loans 16,052 3,001 23.3 187 17,522 2,654 22.8 151
Commercial leasing 7,155 701 5.4 98 5,462 582 5.0 107
Subtotal commercial 23,207 3,702 28.7 160 22,984 3,236 27.8 141
Subtotal individuals
and commercial 229,254 12,873 100.0 56 36,062 11,635 100.0 49
Accrued interest - 18 - - - 18 - -
Total loan portfolio 229,254 $ 12,891 100.0 $ 56 236,062 $ 11,653 100.0 $ 49
1 Before allowance for credit losses
Provision for Credit Losses
Our 2016 provision for credit losses was $10.7 million, compared to $5.0 million in 2015. Generally favourable credit
conditions allowed us to hold our collective allowance steady, with no additional collective provisions for credit losses
required in 2016, despite loan growth of $1.2 billion. The year-over-year increase in our provision for credit losses
was due to specific provisions, most notably related to equipment finance leases. Uncertain economic conditions in
Alberta resulted in an increase to both probability of default and loss given default with respect to our lease portfolio
in the province. Our specific provisions in 2016 were also increased due to a lease-related fraud incident in Ontario.
As a result of very favourable credit conditions, the total allowance for credit losses decreased from $36.8 million
(0.32 per cent of total loans) at year-end 2015 to $32.4 million (0.25 per cent of total loans) at year-end 2016. This
reduction reflects a reduced specific allowance for credit losses from $6.3 million to $1.9 million. This means that the
number of individual loans identified as requiring an offsetting allowance has dropped to historically low levels. Our
impaired loans decreased by $5.3 million in 2016 to $21.3 million, while our total loan portfolio grew. This resulted in
a significant reduction in impaired loans as a percentage of total loans, from 0.23 per cent at the end of 2015, to 0.17
per cent at the end of 2016.
20 Coast Capital Savings Credit UnionManagement’s Discussion and Analysis
Asset quality coverage
As at December 31
in thousands of dollars 2016 2015
Total loans $ 12,858,372 $ 11,616,100
Provision for credit losses 10,733 4,997
Loan writeoffs 16,066 7,203
Total allowance for credit losses 32,413 36,806
Impaired loans 21,279 26,596
Members’ equity 1,043,177 995,278
in per cent
Provision for credit losses as % of total loans 0.08 0.04
Loan writeoffs as % of total loans 0.12 0.06
Impaired as % of total loans 0.17 0.23
Impaired as % of members’ equity 2.04 2.67
Total allowance as % of impaired loans 152.32 138.39
Total allowance as % of total loans 0.25 0.32
Capital Management
Sustainable business growth and expansion of our helpful products and services depends on our ability to maintain
a healthy capital ratio. As we do not currently access capital markets to raise equity capital, retained earnings growth
remains our primary source of capital. Retained earnings growth is generated through strong financial performance,
underscoring the importance of pricing decisions and careful expense management to ensure we earn sufficient
returns.
Regulatory Capital Requirements
The Financial Institutions Commission of British Columbia (“FICOM”) has set a supervisory minimum capital ratio
for B.C. credit unions of 10 per cent. Credit unions falling below this level are required to immediately improve their
position to prevent supervisory intervention. Regulatory capital is measured based on the ratio of capital to risk-
weighted assets. Increases in risk-weighted assets, whether through overall portfolio growth or through a shift
towards higher risk assets, require additional capital.
The regulatory capital formula identifies two types of capital – Tier 1 and Tier 2. FICOM requires that Tier 1 capital
form at least 50 per cent of our capital base. Tier 1 capital is comprised of retained earnings, voting shares, qualifying
investment shares, and contributed surplus (net of deferred income tax assets, intangible assets and goodwill). Tier 2
capital includes subordinated notes and other investment shares. It also includes 50 per cent of our portion of retained
earnings from Central 1 Credit Union (“Central 1”), CUDIC, and Stabilization Central Credit Union (“Stab Central”).
Assets in the regulatory capital formula are risk-weighted based on FICOM risk-weighting categories, which
range from 0 to 150 per cent. For example, conventional uninsured residential mortgages, the largest portion of our
assets, are weighted at 35 per cent, while commercial loans and leases, the second-largest portion, are weighted
at 100 per cent. Concentration risk factors, based on diversification within the portfolio, may also be applied to
determine the risk-weighted asset amount.
The overall risk-weighting of our asset portfolio for 2016 is 46.5 per cent, up slightly from 45.7 per cent in 2015. The
change reflects the year-over-year increase in higher risk-weighted commercial loans and leasing assets.
2016 Annual Report 21Management’s Discussion and Analysis
Maintaining a Sustainable Level of Regulatory Capital
In addition to the supervisory minimum capital ratio, FICOM requires that we establish an internal capital target above
10 per cent. The internal target provides a trigger to allow the Board and management time to resolve unexpected
capital impacts before the supervisory minimum level is reached. Further to this requirement, we annually complete an
Internal Capital Adequacy Assessment Process (“ICAAP”) to assess our level of capital in relation to our risk appetite,
risk profile and external conditions. Based on this, we have set our minimum internal capital target at 13 per cent.
On December 31, 2016, our total capital ratio, including Tier 1 and Tier 2 capital, was 15.58 per cent, down from
16.21 per cent at the end of 2015. The 2016 decrease reflects a 6.5 per cent increase in capital against a 10.8 per cent
increase in risk-weighted assets. Significant factors impacting our capital ratio in 2016 include the following:
• Income earned from operations and added to retained earnings grew our capital
• Investments in software upgrades increased capital deductions
• Strong overall asset growth increased risk-weighted assets, with additional increases from a proportional shift in
assets towards higher risk-weighted commercial loans and leasing assets
As at December 31
in thousands of dollars 2016 2015
Tier 1 capital
Class A shares $ 2,524 $ 2,470
Class B shares 30,444 32,213
Retained earnings 1,010,375 952,949
Deferred income taxes 1
5,693 3,097
1,049,036 990,729
Less: Capital deductions (70,135) (68,555)
978,901 922,174
Tier 2 capital
Portion of equity in Central 1, CUDIC and Stab Central 2 105,153 95,626
Total capital $ 1,084,054 $ 1,017,800
1 Statutory inclusion of only credit union deferred income taxes
2 Portion of system related equity multiplied by 50 per cent
22 Coast Capital Savings Credit UnionManagement’s Discussion and Analysis
Risk-weighted assets
As at December 31
in thousands of dollars 2016 2015 2016 2015
Balance sheet Balance sheet BIS risk- Risk-weighted Risk-weighted
amount amount weight (%) balance balance
Cash resources $ 1,426,134 $ 1,653,770 0 $ – $ –
Commercial paper 506,084 288,652 0–150 158,092 107,480
Residential mortgages 5,594,686 5,245,297 35 1,958,165 1,836,380
Insured mortgages 2,045,777 1,689,012 0 – –
High-ratio mortgages
75 to 80% LTV 1,252,675 1,066,349 75 939,506 799,762
High-ratio mortgages
> 80% LTV 1,083 82,961 75 812 62,221
Personal loans 204,075 227,281 75 141,411 170,461
Commercial loans and leasing 3,735,550 3,296,186 100 3,612,961 3,167,563
Other assets and investments 203,154 186,585 0–100 123,419 108,252
Off-balance-sheet exposure 0–100 21,813 26,097
$ 14,969,218 $ 13,736,093 $ 6,956,179 $ 6,278,216
Risk-weighted assets as a percentage of total assets 46.5% 45.7%
in per cent
Ratio of capital to risk-weighted assets
Primary capital to risk-weighted assets 14.07 14.69
Secondary capital to risk-weighted assets 1.51 1.51
Total capital ratio 15.58 16.21
Total collective allowance for credit losses $ 30,498 $ 30,498
As a percentage of risk-weighted assets 0.44% 0.49%
Risk Management
Overview
To achieve our objectives and goals, we understand that we must selectively and prudently take and manage risks
within our established risk appetite and tolerances, and that a strong risk culture and approach to managing risk is
fundamental to our success. Our Enterprise Risk Management Framework (“ERMF”) defines our risk management
methodology to ensure we effectively identify, assess, measure, control, monitor and report risks within our approved
risk appetite. Consistent application of the ERMF ensures ongoing and continuous reinforcement of an appropriate risk
culture across the enterprise.
Risk Culture
Our risk culture embodies the tone at the top set by the Board of Directors and the Executive Committee (“EXCO”)
and informs, and is informed by, our mission, corporate values, professional standards, and conduct. The governing
objectives developed by the Board and EXCO describe the attitudes and behaviours that we seek to foster among
our employees in building a culture where all employees understand the importance of managing risk and the role
that they play. Our goal is to create a risk culture that promotes accountability, learning from past experiences, and
encourages open communication and transparency on all aspects of risk taking.
2016 Annual Report 23Management’s Discussion and Analysis
Risk Appetite
Our risk appetite is the aggregate level and types of risk that we are willing to accept, or to avoid, in order to achieve
our business objectives.
As we endeavour to improve our members’ financial well-being through Simple financial help, we consider the risks
associated with the strategies available to achieve this goal, our capacity to take such risks, and our appetite for such
risks. Risk appetite considerations are an integral part of management decision-making, guided by Board oversight and
approval of management actions. This includes considering risk appetite in short- and long-term strategic planning,
budget planning, and assessing new products, services, activities and markets.
Ultimately, our risk appetite is driven by:
• Our members’ desire for a strong and stable credit union
• Key performance and risk indicators as determined by our Board
• Legal and regulatory compliance requirements to operate a sound and sustainable organization
Risk Inventory
We define risk as the possibility that an event will occur and adversely affect the achievement of our objectives.
Our ERMF defines and categorizes risks as outlined below:
Strategic Risk
Capital, Credit and
Legal and Operational
Liquidity and Counterparty
Regulatory Risk Risk
Market Risk Risk
Reputational Risk
Risk Principles
We believe in, and support the need for, a strong risk culture rooted in the following principles:
1. We all understand that we take risk every day: As part of our strategy to grow our business, we recognize the
need to take acceptable risks, and manage the level of exposure it brings us, while also protecting our members’
financial well-being.
2. We are all responsible for managing the risk that we take on in a prudent and balanced way: Certain risks are
clearly owned, understood, and actively managed by management, with an understanding that all employees,
individually, and collectively, have the responsibility of managing the day-to-day risks of their job.
3. We integrate managing risk into everything we do: We integrate risk management disciplines and activities into
our daily routines, decision-making, and strategy in a systematic, structured and timely manner (as appropriate).
We also understand that responsibility for managing risk spans all areas, including relationships with third
parties.
4. We have a culture that supports transparent and effective communication: We recognize that mistakes happen,
and we need to recover quickly and gracefully when they occur. We support a culture that ensures that matters
relating to risk are communicated and escalated in a timely, accurate, and forthright manner. It is important to
understand how mistakes happen so that we can work together to quickly fix them and mitigate the risk going
forward.
5. We support the independent oversight provided by Group Risk Management: While acknowledging that the
business “owns the risk,” we also understand the need for independent and objective review of risk policies,
monitoring, and reporting.
24 Coast Capital Savings Credit UnionManagement’s Discussion and Analysis
Risk Governance and Management
We employ a risk management structure that emphasizes and balances strong central oversight and control of risk
with clear accountability for—and ownership of—risk within each business line and corporate function.
Our Risk Principles emphasize that managing risks is a shared responsibility and that everyone plays a role in
effective management of risks within the desired risk appetite, as outlined below:
Board of Directors
• The Board of Directors approves the risk appetite and provides risk oversight through its established committees.
• The Risk Review Committee (RRC) is responsible for overseeing our risk profile and performance against the
defined risk appetite. The RRC approves the ERMF and related frameworks and policies to manage risk to which
we are exposed.
Executive Committee
• Establishes tone at the top, provides strategic direction, manages strategic risk and ensures overall risk profile is
aligned with our strategy, objectives and goals.
• Responsible for developing, executing and managing strategies for their business areas and ensuring such
strategies are aligned with our risk appetite.
First Line of Defense Second Line of Defense Third Line of Defense
Business Segment and Corporate Governance, Risk and Oversight Internal
Line Accountabilities Functions Accountabilities Audit Accountabilities
IDENTIFY SET STANDARDS, INDEPENDENT
AND CONTROL ASSESS and CHALLENGE ASSURANCE
• Identify and assess the risk • Establish and communicate • Verify independently that our
within the respective business enterprise governance, risk and ERMF is appropriately designed
unit and assess the impact control strategies, policies, and and operating effectively
of risks to the respective practices • Validate the effectiveness of
business units • Monitor and report on the First and Second Lines in
• Establish appropriate mitigating compliance with risk appetite fulfilling their mandates and
controls and policies managing risk
• Oversee and report on the • Provide effective, objective
business line’s risk profile and assessment of risk management
supporting operations within practices, processes, controls,
the approved risk appetite and assessments prepared by
• Ensure timely and accurate the First Line of Defense
escalation of material issues • Review and contribute to the
• Deliver training, tools monitoring and reporting of our
and advice to support its risk profile
accountabilities • Provide training, tools and
advice to support the First and
Second Lines in carrying out
their accountabilities
2016 Annual Report 25Management’s Discussion and Analysis
Risk Identification and Assessment
Risk identification and assessment is focused on recognizing and understanding existing risks, risks that may arise
from new or evolving business initiatives, and risks that are emerging as a result of the changing business, economic,
and competitive environment.
Our objective is to establish and maintain an integrated risk identification and assessment process that:
• Considers how risk types intersect
• Supports the identification and assessment of inherent risk
• Supports the identification and assessment of emerging risk
• Identifies existing controls and evaluates the effectiveness of those controls
• Assesses residual risk and determines the appropriate risk response and mitigation strategies
• Assesses the effectiveness of the mitigation strategies
Risk Measurement
The ability to quantify risk is a key component of our risk management process. Our risk measurement processes
align with regulatory requirements such as adequacy of capital and liquidity levels, stress testing and maximum credit
exposures guidelines established by regulators. We have processes in place to measure and quantify risks to provide
accurate and timely measurements of the risks that we assume.
Monitoring Capital Adequacy Risk
Our Internal Capital Adequacy Assessment Process (“ICAAP”) is jointly led by our Finance and Group Risk Management
teams. The ICAAP provides a framework for evaluating and determining the amount of capital we require to manage
through unexpected losses arising from adverse economic and operational conditions. Modelling and stress testing,
applied to both near- and longer-term planning, forecasting and strategic objectives, is a key component of the ICAAP.
Our ICAAP includes the following elements:
• Calculation of required capital levels based on the financial plan for the upcoming fiscal year and current and
prospective risk profiles
• Assessment of key identified risks
• Application of stress testing related to key identified risks using sensitivity analysis to determine capital impacts
under different scenarios
• Assessment of internal capital targets for reasonableness relative to the regulatory capital requirements
• Projection of capital levels forward over multiple years and assessment against regulatory and internal capital
requirements
Application of the ICAAP in 2016 confirmed that our capital levels are healthy and sufficient for achieving our
strategic plans.
Risk Information Specific to Our Financial Reporting
(Information below is an integral part of the audited financial statements)
Credit and Counterparty Risk
Credit and counterparty risk is the risk of loss emanating from a borrower or counterparty failing to meet their
obligation in accordance with contractual terms or a decrease in the value of the assets due to a decrease in the credit
quality of the borrower, counterparty guarantor or the assets (collateral) supporting the credit exposure. We control
these risks using risk rating limits that include portfolio, industry and single name caps. We then regularly monitor
and report these caps to manage any potential issues. Our system for controlling credit risk is founded upon strict
adherence to clearly defined credit policies and approval procedures. We review lending practices and activities on a
regular basis to ensure adherence to policy.
Maximum Exposure to Credit Risk
The table on the following page presents the maximum exposure to credit risk of financial instruments included both
on and off our statement of financial position, before taking into account collateral held or other credit enhancements.
For statement of financial position assets, the credit risk exposure equals their carrying amount. For financial
guarantees granted, the exposure is the maximum amount that we would have to pay if counterparties called upon
the guarantees. For loan commitments and other credit-related commitments that are irrevocable over the life of the
respective facilities, the maximum exposure is the full amount of the committed facilities.
26 Coast Capital Savings Credit UnionManagement’s Discussion and Analysis
As at December 31, 2016
in thousands of dollars Banking Derivatives
On balance sheet
Cash held at Central 1 $ 75,637
Investments held at Central 1 1,328,061
Shares in Central 1 55,751
Other investments 474,863
Loans 12,858,372
Derivative instruments – $ 794
Accounts receivable 7,072
14,799,756 794
Off balance sheet
Letters of credit 42,969
Commitments to extend credit 4,060,003
4,102,972 –
Maximum exposure to credit risk $ 18,902,728 $ 794
Concentration Risk
Concentration risk arises through larger value exposures where a number of borrowers are engaged in similar economic
activities or are located in the same geographic region. Residential mortgages represent our largest concentration of
loan assets at 62 per cent of our total loan exposure. We carry out the majority of our lending activities in the Metro
Vancouver, Fraser Valley and southern Vancouver Island regions of B.C. Residential real estate prices in these regions
have experienced significant price increases in recent years. Understanding that prices often move and fluctuate in
cyclical patterns, we monitor our residential real estate exposure on an ongoing basis, including delinquency trending
and modelling of price change impacts on collateral value. This monitoring, combined with sound underwriting
practices, ensures our residential real estate risk exposure is maintained within an acceptable level.
As at December 31, 2016 Undrawn Letters Total
in thousands of dollars Outstanding commitments of credit Derivatives exposure
Residential mortgages $ 8,967,181 $ 1,606,356 $ 10,573,537
Personal loans 204,075 947,744 1,151,819
Commercial
Construction 906,016 931,843 $ 30,139 1,867,998
Food services and accommodation 114,267 23,650 938 138,855
Agriculture 42,652 2,720 29 45,401
Finance and Insurance 8,794 3,585 49 12,428
Manufacturing 102,097 34,414 10 136,521
Professional 23,989 28,795 93 52,877
Real estate 1,558,077 300,343 4,470 1,862,890
Retail and Wholesale trade 105,980 52,724 1,734 160,438
Transportation 373,122 16,581 280 389,983
Other 466,970 111,248 5,227 583,445
$ 12,873,220 $ 4,060,003 $ 42,969 $ – $ 16,976,192
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