Management Discussion and Analysis Report

Transcription

1

2 Gulf and Fraser Fishermen s Credit Union 2016 ANNUAL REPORT Management Discussion and Analysis Report Introduction Gulf and Fraser Fishermen s Credit Union, operating as G&F Financial Group ( G&F or the credit union ) is a BC based credit union serving members in the Lower Mainland for over 75 years offering a full range of products and services including personal and business banking, wealth management and commercial lending solutions. G&F serves over 30 thousand members and administers over $1.9 billion in assets under administration through a network of 14 branches, a locally based Member Hub, online, mobile, and telephone banking channels as well as a mobile team of experts who meet with members at their convenience. This Management Discussion and Analysis provides an overview of the credit union s financial and operating performance. It is intended to complement our audited consolidated financial statements and should be read in conjunction with those financial statements. The discussion may contain forward looking statements concerning G&F s activities and strategies. Readers are cautioned that such statements may involve risk and uncertainties with respect to the economic, legislative, regulatory and competitive environments, which could cause actual results to differ from the forward-looking statements in this report. Highlights G&F achieved unprecedented growth and exceptional financial performance in Assets increased by a record $303 million or 21.6%, while our membership reached 30,027 as we welcomed 780 net new members into our network. Loan and deposit growth for the year also hit record highs of $225 million (18.3%), and $285 million (22.4%) respectively. In addition, wealth management assets under administration grew by a notable $18 million, or 10.0%. We continued expanding our branch network with the opening of a new boutique branch in the Brentwood neighborhood of Burnaby. G&F FINANCIAL GROUP MANAGEMENT DISCUSSION AND ANALYSIS REPORT

3 Assets, Loans and Deposits (in $millions) 2,000 1,800 1,600 1,400 1,200 1, Assets Loans Deposits Earnings from operations for 2016 of $6.4 million was also a record high for G&F, an increase of 74.6% over 2015 as a result of improved operating margin (net interest income and other income) due to the aforementioned growth in our loan, deposit and wealth portfolios. Although operating expenses did increase on an absolute dollar basis by 3.4% year over year, it decreased as a percentage of assets from 2.12% to 1.90% as the credit union continued to realize operating efficiencies through growth, collaborative opportunities and economies of scale. Total comprehensive income for 2016 was $4.9 million resulting in a 5.8% growth in members equity. G&F marked our 75 th anniversary in 2016 with our Year of Sharing by distributing $385 thousand from both the credit union and G&F Financial Group Foundation. In addition, the Board of Directors approved a dividend return of 4% on member equity shares. G&F remains well capitalized with a capital adequacy ratio of 13.8% at the end of 2016, well above the 8% regulatory requirement Financial Performance TOTAL ASSETS Total assets grew by $302.5 million, or 21.6%, due to growth in both our loan and deposit portfolios. Assets now total $1.71 billion versus $1.40 billion in As deposit and secured borrowings growth outpaced loan growth, cash and financial investments grew by $77.3 million totaling $238 million at the end of Our liquidity position ended the year at 14.4%, which was in compliance with the statutory requirement of 8%. We also saw our membership grow by 2.7% and now have 30,027 members connecting and doing business with G&F. G&F FINANCIAL GROUP MANAGEMENT DISCUSSION AND ANALYSIS REPORT

4 LOANS Loans to members grew by $225.1 million, or 18.3%, reaching $1.46 billion at the end of 2016 versus $1.23 billion at the end of The loan growth was fueled by a sustained low interest rate environment and an active real estate market in the Lower Mainland, particularly in the first half of 2016 before the provincial government introduced the foreign home buyers tax on August 2, The residential mortgages and personal loans portfolio increased by $126.4 million (14.1%) totaling $1.02 billion at the end of The commercial lending portfolio, which equates to 30% of our total loan portfolio, grew by $98.9 million (29.6%) totaling $434 million at the end of 2016 as G&F utilized excess capital to grow the commercial business. G&F s Investment and Lending Policy has established a limit on the commercial lending portfolio (funded and unfunded) of 35% of the credit union s asset base with which the credit union was in compliance. Loans (in $millions) 1,600 1,400 1,200 1, Personal Commercial ALLOWANCE FOR IMPAIRED LOANS The allowance for impaired loans increased by $0.5 million to $3.9 million at the end of 2016 from $3.4 million at the end of The increase in the allowance for impaired loans during the year was a result of a provision for impaired loans of $600 thousand supporting a larger loan portfolio offset by loans written off (net of recoveries) of $106 thousand. The allowance for impaired loans allocated to the residential mortgage and personal loans portfolio is $0.7 million or 18.3% while the allowance for impaired loans allocated to the commercial portfolio is $3.2 million or 81.7%. G&F FINANCIAL GROUP MANAGEMENT DISCUSSION AND ANALYSIS REPORT

5 DEPOSITS Member deposits increased by $285.2 million or 22.4% totaling $1.56 billion at the end of 2016 versus $1.27 billion at the end of Demand deposits grew by $28.2 million, term deposits grew by $249.5 million and registered deposits (i.e., RRSP, RRIF, RESP and TFSA) grew by $5.5 million during the year. TFSAs increased by $7.3 million as members sought out higher tax-free returns on deposits and took advantage of the 2016 annual contribution limit of $5,500. Deposits (in $millions) 1,800 1,600 1,400 1,200 1, Demand Terms Registered SECURED BORROWING During 2016, G&F increased its available operating line and term facility with Central 1 to $84.8 million from $57.9 million at the end of In addition, G&F established a new credit facility agreement with Caisse Centrale Desjardins of $30.0 million. As at December 31, 2016, no amounts were drawn against these credit facilities. As part of the credit union s program of liquidity, capital, and interest rate risk management, G&F securitizes residential mortgages thereby entering into a secured borrowing arrangement with Central 1. The outstanding secured borrowing with Central 1 was $49.8 million at the end of 2016, an increase from the balance at the end of 2015 of $37.5 million. MEMBERS EQUITY G&F achieved net income of $5.2 million and a net unrealized loss from cash flow hedges (net of tax recovery) of $343 thousand in 2016 resulting in total comprehensive income of $4.9 million a return on members equity of 5.8%. Consequently, members equity at the end of 2016 rose to $89 million with a capital adequacy of 13.8%, well exceeding the regulatory requirement of 8% and the supervisory target of 10%. G&F FINANCIAL GROUP MANAGEMENT DISCUSSION AND ANALYSIS REPORT

6 In 2016, G&F continued to execute its strategic plan of deploying and optimizing our excess capital by growing the credit union and investing in the expansion of the branch network, technology initiatives and innovation, staff training and business analytics to provide a better overall member experience. Members' Equity and Capital Ratio $ Millions % 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Capital Ratio Accumulated other comprehensive income Retained earnings Capital adequacy ratio NET INTEREST INCOME G&F and the financial services sector continued to be impacted by a persistent low interest rate environment combined with government regulatory changes in the mortgage market that resulted in ongoing financial margin compression. The Bank of Canada maintained its overnight target rate of 0.50% in 2016 while G&F s prime rate remained at 2.70% throughout the year. With the tightening of financial margin and market competition pushing loan rates to historical lows, G&F s net interest income as a percentage of assets decreased from 1.93% in 2015 to 1.85% in However, on an absolute dollar basis, the credit union s net interest income (the difference between interest earned on loans and investments and interest paid on deposits and secured borrowings) increased by $2.8 million, or 10.6% to $28.8 million due to the growth and our larger asset base. OTHER INCOME Other income includes member services income (such as loan fees and penalties, demand account fees, wealth management income and foreign exchange income), hedge ineffectiveness on cash flow hedges, other income earned by Gulf & Fraser Insurance Services Ltd. (a wholly owned subsidiary of the credit union providing life insurance products and services) and provision for impaired loans. Other income totaled $7.2 million in 2016, an increase of $945 thousand or 15.2% over 2015 largely due to higher loan fees and wealth management revenues and a lower provision for impaired loans. G&F FINANCIAL GROUP MANAGEMENT DISCUSSION AND ANALYSIS REPORT

7 OPERATING EXPENSES Operating expenses increased by $975 thousand or 3.4% to $29.6 million in 2016 mainly in the areas of occupancy which included costs related to the opening of our new Brentwood branch and data processing attributable to enhancements in technology and innovation initiatives. Notwithstanding, the operating expenses as a percentage of assets decreased from 2.12% in 2015 to 1.90% in 2016 as the credit union continued to realize operating efficiencies through growth, collaborating with other like-minded organizations and economies of scale. EARNINGS FROM OPERATIONS Earnings from operations was a record $6.4 million in 2016, up $2.7 million or 74.6% compared to Over the last five years, G&F has been making strategic investments to improve the sales and service delivery and overall member experience. Specifically, G&F opened the West Richmond Branch, the North Burnaby Branch and the Member Hub in 2012, followed by the Willoughby branch in Langley and the West Broadway branch in Vancouver in 2014, and most recently the new boutique Brentwood branch in Burnaby during Although these were significant investments over several years with initial start-up costs, the cumulative benefit of attracting new members and growing the loan, deposit and wealth portfolios resulted in the strong financial performance for Operating Income (in $millions) In marking our 75 th anniversary in 2016 with our Year of Sharing, G&F highlights a long history of sharing our profits with the local communities in which we live and serve in the form of donations, sponsorships, educational bursaries, and scholarships. Total distributions from both the credit union and G&F Financial Group Foundation were $385 thousand or 6.0% of earnings from operations in G&F FINANCIAL GROUP MANAGEMENT DISCUSSION AND ANALYSIS REPORT

8 TOTAL COMPREHENSIVE INCOME The total comprehensive income for 2016 was $4.9 million which included a 4% return on members equity shares approved by the Board of Directors of $109 thousand, a provision for income taxes of $1.1 million and a net unrealized loss from cash flow hedges (net of tax) of $343 thousand. FUNDS UNDER ADMINISTRATION Funds under administration by G&F comprise of commercial loans that are administered by the credit union and syndicated with other financial institutions due to the loan amount being above the credit union s single member cap or above the credit union s risk tolerance to fund on its own. The syndicated loan balance ended 2016 at $47.4 million, an increase of $20.9 million for the year. Also included in funds under administration are investments and mutual fund accounts that are managed by our wealth management specialists on behalf of members. This portfolio (at market value) grew by $17.9 million or 10.0% in 2016 to end the year at $198 million. Risk Management G&F is subject to a variety of risks that are inherent to the industry in which it operates. The credit union s principal risks are credit risk, liquidity risk and market risk given the nature of our business is holding financial instruments as identified in Note 20 of the audited consolidated financial statements. Other risks the credit union faces are strategic, operational, legal, regulatory and reputational risks. To mitigate these risks the credit union has policies and procedures, controls and monitoring in place. The Board of Directors has overall responsibility for the establishment and oversight of the credit union s strategic direction, risk management framework and risk appetite. The executive management team is responsible for implementing strategies and policies approved by the board and for developing processes that identify, measure, monitor and mitigate risks. The credit union also has internal and external audit functions which are independent of management and report to the Audit Committee. G&F FINANCIAL GROUP MANAGEMENT DISCUSSION AND ANALYSIS REPORT

9 2017 Outlook Heightened economic volatility has lowered forecast expectations for the Canadian economy for Nonetheless, the BC economy is expected to have one of the highest economic growth rates in Canada as the province continues to benefit from a steady-growth economy and low interest rates, low oil prices, and a low Canadian dollar. The low interest rate environment will continue as it is anticipated the Bank of Canada will keep their target overnight rate on hold through A rising US rate environment and fiscal policies from the Trump administration promising corporate tax cuts, increased infrastructure spending and deregulation will place upward pressure on Canadian bond yields which could translate into higher mortgage rates for consumers. The Metro Vancouver housing market has slowed down with the introduction of the foreign home buyers tax and government tightening of mortgage insurance rules returning to a more balanced market between buyer and seller with moderate decreases in housing prices expected in In light of this forecast, the credit union is expecting to increase its assets under administration with a year of steady growth levels in its loans, deposits and wealth management portfolios. The financial landscape is everchanging and G&F will continue to evolve and innovate to keep pace with how our members wish to interact with us. Further expected financial margin compression in the financial sector will be offset by the credit union realizing efficiencies through scale and seeking partnerships and collaborative opportunities of mutual benefit. G&F s business plan for 2017 focuses on five strategic areas Grow the Business, Service Excellence, People and Culture, Financial Strength and Community Investment. G&F FINANCIAL GROUP MANAGEMENT DISCUSSION AND ANALYSIS REPORT

10 GULF AND FRASER FISHERMEN S CREDIT UNION Five-Year Overview Financial Highlights (Expressed in thousands of dollars) Consolidated Statement of Financial Position (unaudited) ASSETS Cash and investments $238,253 $161,000 $138,179 $142,032 $111,484 Loans 1,455,277 1,230,167 1,121,748 1,043, ,405 Premises, equipment, intangible assets, properties 7,768 7,516 9,365 8,064 9,062 Other assets 4,312 4,386 4,656 4,188 10,067 $1,705,610 $1,403,069 $1,273,948 $1,197,570 $1,088,018 LIABILITIES AND MEMBERS EQUITY Deposits $1,557,016 $1,271,819 $1,150,106 $1,105,640 $999,976 Members' shares 3,522 3,547 3,593 3,682 3,734 Secured borrowings 49,758 37,459 38,755 9,975 10,850 Other liabilities 6,189 5,991 3,021 2,839 3,420 Members' equity: 1,616,485 1,318,816 1,195,475 1,122,136 1,017,979 Accumulated other comprehensive income Retained earnings 88,601 83,386 78,155 75,434 70,039 89,125 84,253 78,473 75,434 70,039 $1,705,610 $1,403,069 $1,273,948 $1,197,570 $1,088,018 G&F FINANCIAL GROUP MANAGEMENT DISCUSSION AND ANALYSIS REPORT

11 Consolidated Statement of Comprehensive Income (unaudited) Interest income $47,735 $43,265 $41,940 $40,310 $40,134 Interest expense 18,917 17,204 16,661 15,560 14,780 Net Interest Income 28,818 26,061 25,279 24,750 25,354 Other income 7,177 6,232 5,877 5,452 5,585 Operating margin 35,995 32,293 31,156 30,202 30,939 Operating expenses 29,613 28,638 27,876 25,863 26,172 Earnings from operations 6,382 3,655 3,280 4,339 4,767 Gain on sale of premises 0 3, ,372 0 Gain on sale of general insurance business ,454 Loss on sale of assets held-for-sale (84) 0 Donations to G&F Financial Group Foundation 0 (1,000) Distributions to members (109) (110) (109) (113) (112) Income before income taxes 6,273 5,893 3,171 6,514 6,109 Provision for income taxes 1, Net income from continuing operations 5,215 5,231 2,721 5,573 5,389 Net loss from assets held-for-sale (178) (137) Net income 5,215 5,231 2,721 5,395 5,252 Net unrealized gain (loss) from cash flow hedges (net of tax) (343) Total comprehensive income $4,872 $5,780 $3,039 $5,395 $5,252 Financial Statistics (unaudited) Asset growth 21.6% 10.1% 6.4% 10.1% 3.7% Loan growth 18.3% 9.7% 7.5% 9.0% 5.0% Deposit growth 22.4% 10.6% 4.0% 10.6% 2.4% Operating efficiency 80.92% 85.20% 87.92% 84.24% 83.78% Percent of average assets (unaudited) Net interest income 1.85% 1.93% 2.08% 2.20% 2.39% Other income 0.46% 0.46% 0.48% 0.47% 0.52% Operating expenses 1.90% 2.12% 2.29% 2.29% 2.46% Earnings from operations 0.41% 0.27% 0.27% 0.38% 0.45% Net income 0.33% 0.39% 0.22% 0.48% 0.49% Other statistics (unaudited) Retail branches Membership 30,027 29,247 27,808 26,675 26,358 Investment portfolios and mutual funds, at market value $197,646 $179,697 $160,616 $132,310 $96,092 Syndicated loans $47,350 $26,446 $748 $1,897 $1,079 Assets under administration $1,950,606 $1,609,212 $1,435,312 $1,331,777 $1,185,189 G&F FINANCIAL GROUP MANAGEMENT DISCUSSION AND ANALYSIS REPORT