Annual Report 2016

Don’t just bank. Prosper.

together

building prosperity

Prospera Credit Union

Annual Report 2016

When I need something, it isn’t just a cookie cutter solution. It’s a personal package built just for me.

“

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Annual Report 2016

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The first few years were tough and there was a point where I needed to consolidate debt from all my start ups. Prospera gave me a line of credit when no one else would.

“

JOEL PRIMUS

FOUNDER, NAKED INC

Annual Report 2016

Prospera Credit Union

Management’s Discussion and AnalysisFor the year ended December 31, 2016

DON’T JUST BANK. PROSPER.Building on more than 70 years as a BC credit union, Prospera is proud to serve a membership that is 63,000 strong. As a values-based financial institution, our number one priority is the financial well-being of families and businesses in our local communities and our dedicated team is here to serve all of their banking, lending, investing and insurance needs through sixteen branches; online and mobile banking and an alternative channel that includes a locally-based Contact Centre and Broker Centre. Through our affiliation with The Exchange network, members enjoy access to thousands of surcharge free ATMs across Canada.

Making life better for everyone is important at Prospera, which has an extensive community investment program devoted to supporting the organizations, events and volunteers that make our BC communities stronger. To learn more, check out Prospera’s websites and social channels: prospera.ca, Facebook, Instagram, Twitter, www.dontjustbankprosper.ca.

Prospera’s unique value proposition is providing a differentiated member experience. We believe everyone deserves financial wellness and our financial specialists continuously seek opportunities to provide advice that is specific to members’ short and long-term financial goals. In support of this strategy, we continue to focus on our people, attracting talent that is aligned with our values and business model, while also investing in technology and innovation to provide efficiencies and enhancements for both staff and members of Prospera. We know our strategy is working because our members and our employees tell us so. This year, we attracted over 4,000 new members to Prospera (with net member growth of nearly 1,000) and were recognized as a 2016 Great Place to Work by the Great Place to Work Institute.

TRANSFORMING THE WAY WE DO BUSINESSDuring 2016, we undertook an important project to develop our long-term strategy and vision for Prospera. As part of this work we revisited our purpose, vision and values to ensure that they align to and represent who we are and what we are about. Our purpose (what we do) and values (what we stand for) remain constant.

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Annual Report 2016

Our vision (what we want to become) reimagines our presence and part in the lives of our members and communities. We want to grow and help others grow – bring the financial dreams of our members to life, whatever they may be; grow prosperity for our communities, and grow Prospera to be a stronger organization.

We also developed a set of guiding principles or commitments that frame our plan and how we want to do business everyday and achieve the vision. The plan and supporting statements provide a source of constant guidance to transform and drive the way we do business.

PURPOSE, VISION and VALUESProspera’s Purpose, Vision and Values are at the foundation of our short and long-term plans and act as a strong guide for direction and alignment.

Our purposeAt Prospera, we have a strategic imperative to grow a strong, sustainable credit union to ensure that we continue to make a meaningful difference in the financial well-being of our members; which in turn will support and strengthen the financial, social and economic resiliency of people in our local BC communities.

Our visionWe are the trusted home for families and local businesses, building their financial dreams and prosperity within our communities. We are transforming the way we do business to grow Prosperity.

Our valuesEverything we do at Prospera is based on our values of accountability, focus, teamwork, integrity, passion, member first and community. In alignment with the co-operative principles that are at the heart of our credit union, these are the values that guide us every day.

STRATEGIC PRIORITIESAt Prospera our focus is driving towards the right goals, while understanding what matters for the business, our members and our communities. We recognize the changing environment within our economy and industry and have a strong desire to improve how we do business and how we serve our members and community. As previously mentioned, a significant achievement for 2016 was the development of a new long-term strategy for Prospera that sets us on a path for growth and the ability to improve revenues, enabling investment into the things that matter to Prospera’s members. Our long-term strategy frames everything we do and encompasses five individual strategies.

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Annual Report 2016

These five foundational pillars provide the strategic direction to grow our business, develop our capabilities and determine where best to invest resources within Prospera. This is a long-term plan, intended to guide the choices made by management and the Board over the coming years.

2016 HIGHLIGHTSThis past year proved pivotal for Prospera as much of it was spent driving growth and change and setting the stage for investment into our future. After an extended period navigating the changing economy and “staying the course,” 2016 brought renewed energy, engagement and excitement. This new drive for growth and improvement persisted through continued influence from a shifting landscape on many fronts. The strong housing market brought significant opportunity for growth but also prompted significant change as new rules were introduced for borrowers by regulators, insurers and government in an attempt to normalize the market. Interest rates remained at all time lows and the Canadian dollar proved highly sensitive to global reaction to the United States election, economy and efforts to stabilize oil prices.

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Growth was a primary highlight for 2016 with outstanding results not only in net loans to members of over $340 million but also in welcoming over 4,000 new members in the year. As a result of this success we reached two key milestones in the year: Balance Sheet Assets of $3 billion and Assets Under Management of $4 billion.

At the heart of our short and long-term strategy, growth supports a strong financial foundation that enables Prospera to transform the way we do business and invest in the areas that will help us fulfill our vision to be the trusted financial home for families and local businesses. A number of key initiatives to achieve this vision were identified during this planning year. Many of these initiatives launched during 2016, however, some of them span more than one fiscal year, with the design and build taking place in one year and implementation in the following year. We also saw completion in the year of initiatives aimed at improving the member experience and our service delivery to members.

One key long-term project that was completed in 2016 gives our employees the ability to provide a more integrated and holistic service delivery experience that spans all channels and product types. During the year, we also introduced an advanced online banking platform for business members who have more complex operational needs. In addition, we launched an IIROC investment certification program for our Wealth Management staff, which will result in our ability to offer more investment options for members. The conversion to a new ATM network switch provider in 2016 allowed us to begin offering Interac Flash® (tap) debit cards to our members by the end of the year. We are also working to enhance and streamline our internal business processes to allow us to work more efficiently and smarter. As part of these efforts, we created a new innovation platform that allows Prospera employees to identify and effect positive change within the organization. This program promotes a strong culture of innovation and empowerment across Prospera.

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Annual Report 2016

OVERVIEW OF 2016 OPERATING RESULTS

Financial results in 2016 were strong on all fronts, with increased earnings and strong growth across the board. This allowed Prospera to reach two key growth milestones in the year: Assets Under Management of $4 billion and Balance Sheet Assets of $3 billion. The success in 2016 is attributed to a strong and driven team at all levels as we forge ahead towards achieving our long-term strategy, which calls for growth and innovation in the service and experience provided to our members and how we do business.

Balance Sheet Assets reached $3.25 billion in 2016 after loans to members grew by 15% or $341.2 million in 2016, our highest growth rate in over a decade. This growth was primarily funded by strong member deposit growth, supported by existing members as well as 4,000 new memberships opened in the year.

Our Wealth Management portfolio grew by $77.8 million in the year, providing a total of more than $768.4 million in addition to our Balance Sheet Assets to bring Assets Under Management over the $4.06 billion mark.

Net Income From Operations (income before dividends on member deposit shares) for 2016 was $11.2 million, an improvement of $1.9 million over 2015. Earnings picked up strength in the areas of core margin activities as loan interest improved with high growth. Although margin compression was not significantly eased during the year, deposit costs were reduced as longer term deposits renew and reprice to today’s rates. Reductions in provisions for credit losses and additional revenues achieved outside of core net interest income (liquidity management activities, investments and Wealth Management revenues) brought Net Interest Income and Other Income to $71.3 million, an increase of $4.1 million over 2015.

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Assets under management ($B) 4.06

2016

3.62

2015

12%

% change

3.25 2.88 13%Balance sheet assets ($B)

2.67 2.32 15%Loans ($B)

2.69 2.45 10%Deposits ($B)

11.2 9.3 20%Net income ($MM)

37 34 9%Return on average assets (bps)

Key performance metrics

Annual Report 2016

Operating and regulatory expenses of $60.1 million increased by $2.2 million in the year. The increase reflects careful management of discretionary costs while investing in areas that enable us to better serve our members. These earnings contributed an additional $7.8 million to members’ equity. Retained Earnings and Members’ Equity Shares serve as the foundation to support Prospera’s capital base and our ability to grow and invest in the areas that matter.

Balance sheet

AssetsTotal assets grew by 13% or $370.7 million in 2016 to $3.25 billion. This was primarily driven by loan growth of 15% or $341.2 million to $2.69 billion. After a slow period for lending in the prior year, 2016 brought a surge in activity with renewed energy and drive towards achieving our long-term strategy and making key investments into improving the member experience and how we do business. Flat interest rates and a consistently strong real estate market raised house prices and consumer appetite throughout the year, adding to our success.

Prospera’s liquidity position (cash and cash equivalents and interest bearing deposits with financial institutions) held relatively flat as cash inflows from strong deposit growth and securitization activities were used to fund lending. The total investment portfolio grew by $25.4 million to $96.3 million, primarily in assets related to securitization activities (government backed securities) of $16.3 million with a further increase of $9.1 million in other investments in various funds designed to increase diversification and return in the portfolio.

LiabilitiesTotal liabilities grew by 13% or $362.9 million, to $3.12 billion in the year. This includes member deposit growth of 10% or $244.8 million to $2.69 billion in the year. We began the year with strong momentum carried forward from 2015 and the launch of our new service and advice delivery model, which emphasizes the importance of working together and putting the member first in everything that we do. High growth continued into 2016 in line with our strategy, awareness in the marketplace and focus on the member experience through enhanced technologies and service. Maintaining strong relationships with large depositors in the community (such as municipalities) is also an area of focus. Borrowings for the year grew $118.4 million, to a total of $411.5 million. The increase is specific to secured borrowings associated with securitization programs. Regular or line of credit borrowings of $45.0 million were reduced to zero in the year. Secured borrowings provide a long term and stable form of funding, something that is more difficult to achieve through member deposits (primarily due to low interest rates).

Members’ EquityMembers’ Equity grew by 6% or $7.8 million to $131.7 million and includes Retained Earnings growth and changes in Members’ Equity Shares and Other Reserves. Retained Earnings grew by $9.0 million to $133.5 million in 2016.

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Annual Report 2016

This is an improvement in earnings of $1.4 million over the prior year. Retained Earnings is the primary source of equity and reflects the equity that is derived from the accumulation of Prospera’s earnings before Other Comprehensive Income (OCI). The intent of OCI is to capture and identify unrealized market gains and losses which flow through to Other Reserves within Members’ Equity. From year to year this category can swing from positive to negative as valuation changes relating to derivatives and pension obligations are taken into account. During the year Prospera recorded a net unrealized loss of $887 thousand in OCI, increasing the cumulative net unrealized loss in Other Reserves to $5.3 million. The primary driver of this loss is $801 thousand specific to changes in value of cash flow hedges and $81 thousand relates to changes in the net obligation of our defined benefit pension plans.

Income statement

Net Interest IncomeNet Interest Income improved by $2.8 million to $57.8 million in 2016. The Interest Income earned on member loans of $83.6 million increased year over year by $1.0 million driven by strong growth of $341.2 million in the year despite a persistently low rate environment. Deposit costs are also impacted by low rates driving further improvement of $2.2 million to $32.9 million as longer term deposits renew and reprice at lower market rates during the year. Outside of the total core margin improvement of $3.2 million, total treasury and liquidity management activities remained relatively flat on a net basis with a decline of $371 thousand to $7.1 million. The net revenues from these activities are primarily comprised of interest bearing deposits, line of credit and secured borrowings and other financial assets.

Provision For Credit LossesProvision for credit losses reduced by $2.0 million in 2016 to a net expense recovery of $729 thousand compared to a prior year expense of $1.3 million. The provision for credit losses in a given year represents the expense or recovery required to adjust the allowance for credit losses to the appropriate level. The allowance for credit losses is determined through analysis of a detailed credit loss model combined with a qualitative adjustment based on management judgement for factors not fully captured in model. A declining trend in credit loss experience and impairment levels in the loan portfolio reduced the amount of allowance for credit losses required.

Other IncomeTotal Other Income decreased by $775 thousand to $12.7 million. Other Income primarily includes revenues from Wealth Management, transactional services and foreign exchange. Investment management revenues increased by $111 thousand to $5.5 million and along with our mutual fund portfolio continued to grow despite market volatility that carried forward from 2015.

The strength in this line of business is a direct reflection of our focus on providing the right service and advice to each member through our Roadmap to Financial Freedom program. Operational structure changes made during the year were designed to further improve and streamline our service delivery through the integration of our Personal Banking and Wealth divisions to create a newly formed Family Banking and Wealth group. Our service fees and insurance commissions held flat at $4.7 million and $1.0 million, respectively. Loan fees increased by $113 thousand to $752 thousand, in line with increased growth in this area. Foreign exchange revenues decreased $228 thousand to $496 thousand driven by reduced volumes and value of the Canadian dollar. Gains are normalized in 2016 at $132 thousand after the prior year recognition of a total of $823 thousand as part of our investment and liquidity management efforts.

Operating ExpensesTotal Non-Interest Expenses for the year increased by $2.2 million to $60.1 million. Our long-term vision calls for growth and investment, which means costs to fund this will rise in the short term. These efforts are expected to improve revenues and profitability and enhance our ability to continuously work towards cost efficiencies.

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The increased costs in 2016 primarily reflect investments focused on three key areas: growing the business, innovation and technology funding and employees. Funding innovation and technologies that improve our ability to deliver service and advice the way our members need is a priority. These same technologies can be leveraged to improve efficiencies in our operations to allow us to work smarter, focus on what’s important and ultimately improve revenues to grow our business. Rewarding our employees and attracting the right talent is equally important. Staff at Prospera worked hard at all levels throughout 2016 to achieve strong growth and results in many areas. As part of our transformation we made key high level operational changes that resulted in improved alignment of our structure to how we want to do business and an improved ability to serve our members.

2017 OUTLOOKWe caution readers on the use of this forward-looking information. Our performance is subject to change due to economic conditions, changes in interest rates or legislation governing credit unions in British Columbia.

Many external variables will continue to influence our business into 2017. The housing market is expected to cool after a robust year in 2016 and house prices to correct to a small extent. The impact of economic changes in the United States will cross the border into Canada through potential pressure on Canadian rates, the potential for change in trade relationships in our market, oil prices and the value of the Canadian dollar. Interest rates globally and nationally remain at all-time lows but we could see marginal increases through 2017. Technology and increasing access to data continues to play a role in challenging business models through innovative new solutions and services. In turn, this affects a shift in member behaviours and preferences, driving the need to remain flexible and innovative in our own solutions and services at Prospera.

In 2017, we continue our focus on setting the stage for achieving our long-term strategy. This includes a number of initiatives identified to improve the member experience, explore innovation, review and transform our operating model and branch footprint and grow the business. We anticipate increased revenues driven by strong growth in 2016 to continue into 2017. Costs will also rise to fund these investments in the short term but will lay the foundation for improved profitability as we transform and grow.

RISK MANAGEMENT FRAMEWORKAs a financial institution, Prospera is subject to a variety of risks that are inherent to the business. Effective risk management is fundamental to our success. The primary goals of risk management are to ensure that the outcomes of risk-taking activities are consistent with our strategies and risk appetite (as outlined by the credit union’s Board of Directors) and that there is an appropriate balance between risk and reward in order to maximize member benefit.

Prospera has developed an enterprise-wide risk management framework that helps us understand and mitigate all identified risks through continued monitoring and analysis. The key risk categories that are considered in this framework include credit, market (including interest rate risk), financial, regulatory, operational and strategic risks. The principal risks are focused on the areas of credit, liquidity and market, which is primarily driven by fluctuating interest rates. Prospera also works with an Internal Capital Adequacy Assessment Process (ICAAP) model to help ensure that our capital levels are sufficient to cover ongoing operations and all material risks as they are understood by management.

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Prospera’s risk management policies are designed to identify and analyze risks, to set appropriate risk limits and controls, and to monitor the risks and adherence to limits by means of reliable and up-to-date information systems. Prospera’s approach involves identifying particular events or circumstances relevant to its objectives, assessing them in terms of probability and magnitude, determining a response strategy and monitoring progress. We regularly review our risk management policies and systems to take into account changes in markets and products as well as best practices.

Risk management is carried out by a number of delegated committees reporting to the Board. The Executive Risk Committee has the primary responsibility for overseeing enterprise risk at Prospera and providing guidance to the Board on risk related matters. The Board provides written principles for risk tolerance and overall risk management, and management reports to the Board on compliance with Prospera’s risk management policies. In addition, Prospera maintains an internal audit function, which is responsible for the independent review of risk management and our control environment.

Principal RisksCredit Risk – Credit risk is primarily related to the risk of financial loss due to the inability to fully collect on amounts due to Prospera. This includes loans to members and other counterparties that we engage with. Prospera has a comprehensive set of controls around prudent lending practices and these practices are reviewed regularly to ensure that they are appropriate and adhered to, given the risks that exist. Prospera maintains an allowance for credit losses on the balance sheet and continuously monitors the required level of this allowance through a comprehensive model that outlines the potential risks within our portfolio.

Liquidity risk – Liquidity risk relates to the risk that Prospera may encounter difficulty in raising funds to meet its obligations to members and other liabilities. To mitigate this risk, Prospera continuously monitors current and upcoming liquidity levels to ensure that we are able to meet funding and operational requirements and maintain a minimum threshold.

Interest rate risk – Interest rate risk is the risk of loss that results in changing interest rates. This impacts many areas of operational earnings including interest on loans, deposits and other investments.

Other – Other risks identified and considered in our risk management framework include the risk of loss related to areas such as operational, legal, regulatory compliance, strategic and reputational.

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Annual Report 2016

Don’t just bank. Prosper.

Prospera Credit Union

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