Management Discussion and Analysis
Respectively Submitted by Lynnette Houston, General Manager
This Management Discussion and Analysis (MDA) is presented to enable readers to assess material changes in the financial condition and operating results of Earl Grey Credit Union Limited for the year ended December 31, 2014, compared with prior years, planned results and future strategies. This MDA is prepared in conjunction with the Consolidated Financial Statements and related Notes for the year ended December 31, 2014 and should be read together.
2014 marked the continuation of a slow recovery from the global economic recession in 2008/2009. The Bank of Canada continues to have a cautiously optimistic outlook on the Canadian economy by holding its bench-setting prime lending rate at record low levels in a continued attempt to aid in economic stimulation. As a result, reflected in a continued squeeze on margins. With interest rates continuing to be low, there is a caution that consumers do not incur debt that becomes unmanageable as rates eventually increase.
The governance of Earl Grey Credit Union is anchored in the co-operative principle of democratic member control. The credit union maintains a professional approach in its operations, and accountability to our membership. Earl Grey Credit Union strives to meet the highest standards in its conduct, consistently seeking to maintain or improve our professional, legal, and ethical reputation.
The board is gaining a more youthful perspective from our members with Mitchell Nixon joining the board. This comes at a time when our credit union is more focused than ever in engaging young adults. We look forward to Mitchell providing fresh, youthful insight as a board member.
The Board of Directors, acting as our risk committee, provide the oversight of our risk assessment plan to ensure strategies and action plans are appropriately managing our enterprise risks. Earl Grey Credit Union’s financial capacity to handle risk continues to be acceptable based on our capital position and profitability. Our balanced scorecard is the working plan and used to measure organizational performance.
With assets at December 31, 2014 of just over $30 Million , a strong capital base of just under $2.5 Million and 869 members we are well positioned for the future. Too little capital means the Credit Union is unable to grow and generate good returns and risks failure because it has no cushion against occasional losses. Capital is also used to determine lending limits that support members’ needs. The lending limit per member for 2015 is $545,000 which represents 22% of capital and within the regulatory maximum of 25% of Capital.
Levels of capital to be held by a credit union are determined through regulatory requirements and failure to meet these requirements would have significant impact on how we provide service to our members. With this in mind, the Board decided there was no room to approve a member patronage for the 2014 fiscal year and continued to build our capital to balance our growth and risks. As of April 2015 we are reducing our service charge fees by the elimination of service charges related to card purchase transactions. In turn, as our third party service providers continue to increase their cheque processing fees, as of April 2015, we have increased the service charge fee per cheque transaction processed to $1.00 but left the maximum monthly service charge ceiling of $12.00 in place. Loan syndication purchases continue to be a strategy to increase revenues since loan interest is by far our largest revenue generator. Our loans to assets ratio at 2014 yearend was 77.75% as compared to 66.70% in 2013. Increased profitability in the future will allow the board to review resuming Patronage Dividend Allocations while still building capital to sustain growth and off set risk.
The board’s continued attention to proper capital management over the years has ensured that your credit union has been able to grow and thrive. A strong capital base reduces the threat of our future autonomous viability from risks outlined in this annual report when so many other credit unions are merging or branches closing. Our commitment is to ensure that the needs of our members and our community come first by retaining local decision making. Today’s members are indeed fortunate to belong to such a strong and stable organization.
A major challenge for our credit union is the regulatory burden. Since the financial collapse of 2008/2009 the regulatory burden has increased annually and shows no signs of letting up. This has resulted in our credit union spending significant resources, both human and financial, in the areas of audit, measuring and assessing risks and ensuring we are adequately prepared to serve our members now and into the future. This includes what seems like a never ending string of audits and examinations by various bodies.
We continue to strive to be the financial service provider of choice for our members by providing products and services with personalized professional service at a low cost, while also recognizing the commitment to our values and co-operative principles. An emerging risk is the credit union’s ability to sustain and keep pace with changing financial service industry technologies. Technology is one of the key service delivery channels for Earl Grey Credit Union Limited. We recognize that our members, of all age groups, are becoming more familiar with the delivery of service through technology and that there is an increasing demand to offer enhancements and improvements in this area of our service delivery. Online Banking is becoming as important to members as “In Branch” services. We continue to follow the changes in technology and recognize the need to plan for the time and increased cost to implement new services. Our technology plans for 2015 includes Remote Cheque Capture for our outgoing clearing items, (image processing of cheques presented over the counter in our office); an upgrade to Member Direct home banking; issuing new MemberCard’s that include Flash Technology; and a revised website to enhance our members Online Banking experience. Today members can receive deposits thru E Transfers but we do not have the technology that would provide our members the ability to send funds to other institutions through E-Transfers. Later in 2015, as long as our financial budget goals are being met, we are contemplating the implementation of full service E-Transfers which would be an investment of $40,000 and increase our monthly operating expenses. The next online banking item we will making plans to implement is Remote Cheque Capture for members in 2016. We see a greater role for electronic transactions in all aspects of our lives and the requirement for continued investment in this area of service delivery. In 2015 with the goals of: increasing our member’s service experience with timely delivery of statement information; reduction in computer processing costs; the cost of paper & envelopes; staff time; and postage expenses we will have a campaign to ensure members know about our Electronic Account Statements service offering so as to encourage members to move to this service.
Another emerging risk is our credit union’s ability to sustain the expenses associated with the choice rewards program. In 2015 we will be looking at implementing an annual subscription fee on any Global Payment MasterCard collecting choice rewards. In addition, we will be encouraging members to move to our partner, CUETS Credit Card products that collect choice rewards. In addition, some of their card products collect double choice rewards on purchases. A number of our members who have moved to their products are very pleased with their products and service.
A good measure of credit risk is the ratio of loans past due more than 90 days to total loans. We commend our members for their attention and responsibility toward ensuring their loans are repaid as agreed. This is reflected in no loan write-offs incurred by the credit union in 2014 and a delinquency rate of 0.16% well below the maximum of 1.00% set by the board.
Disaster recovery and pandemic plans are in place to provide a business continuity process to deal with the possibility of a catastrophic event or other exceptional business interruption.
Throughout our credit union’s history we have stayed true to the co-operative principles. One thing that remains the constant with our success is the people. Our success is not only dependent on our members’ support, but also our employee’s commitment. Our employees work hard to ensure our members are treated with respect, integrity, professionalism and service delivered with a smile. To support our objective of increased member loyalty, training of front-line employees continues to be provided, with special emphasis on product knowledge. In turn, Earl Grey Credit Union is committed to providing a work environment where all employees are treated with courtesy and respect. Our credit union employs local people in good jobs with high quality health and pension benefits.
In 2014 Rebecca Beddington left our employment as our casual part time Member Service Representative to take a full time employment position. Our thanks to Rebecca for the contribution she made to our service team. At the present time we have no plans of filling the vacancy created due to her departure.
We continue to value the importance of our community participation and the difference we make through our sponsorships, donations and scholarships. We support our community groups – fire department, ball park, rink, golf course, minor hockey, splash park – to name just a few, and we are always open to suggestion or request for a donation. Our 2014 donation budget was 5% of budgeted net income or $8,550. You will often find raffle tickets on our front counter , dinner theatre tickets for sale and our community bulletin board always looks full. Our new website being set up this spring will include the community calendar events section. Our staff and board members have contributed countless volunteer hours to benefit the communities in which they live. The credit union pays significant property taxes that benefit those who reside in our community. Our members can count on the fact that in supporting their credit union they are supporting everyone within the community we serve.
A renovation began in early 2014 within our existing building space due to a number of maintenance items requiring attention and the requirement for more offices for staff. The last credit union office renovation was in1992. The big driver for our current renovations was our asset (loan) growth and our goal of protecting the confidentiality of those who we do business with, including services provided over the telephone. The renovation included a number of major maintenance items such as the replacement of : front &back doors; all windows;; window coverings; rugged area of the building ; “facelift” to the front of the building; re- facing of the Member Service Area workstations and changing the work surface to desk height for the staff; and a fresh coat of paint throughout. As planned there was no service interruptions during the renovations and business continued as usual from the member’s perspective. We appreciate member’s patience during the renovation project when you entered our “construction zone”. We appreciate the staff’s patience while working in a construction zone and their dedication to ensuring day to day member service was not affected. We invite all members to our grand opening celebration being held on Friday, April 17.
I am very proud of Earl Grey Credit Union and the people that I work with who make this organizational successful.
Our growth and success are due to the commitment of our members. Thank you for your continued support and trust in Earl Grey Credit Union Limited. It is our privilege to have you as a member.
I want to thank the Board of Directors for their continued support and belief in my abilities as their manager.
My thanks also to our capable and dedicated staff without whom the success of our credit union would not be possible. They are the ones on the front line who make every interaction with our members a pleasant retail experience.
We look forward to serving you for many years to come.
Enterprise Risk Management
The concept of risk management is founded on the premise that as a financial institution, Earl Grey Credit Union Limited accepts risk as part of our normal operation. This risk is offset by capital and management practices to ensure the continued operation of Earl Grey Credit Union Limited. Each year our credit union spends significant resources measuring and assessing risks and ensuring we are adequately prepared to serve our members now and in the future. This process is called enterprise risk management or ERM for short, and is a requirement of credit unions in Saskatchewan as laid out by Credit Union Deposit Guarantee Corporation. Ultimately the objective of risk management is to identify, measure, aggregate and manage risks effectively, and to allocate resources appropriately.
Strategic Risk is the risk that adverse decisions, ineffective or inappropriate business plans or failure to respond to changes in the competitive environment, customer preferences, product obsolescence or resource allocation will impact our ability to meet our objectives. This risk is a function of the compatibility of an organization’s strategic goals, the business strategies developed to achieve these goals, the resources deployed against these goals and the quality of implementation.
Market Risk is the exposure to potential loss from changes in market prices or rates. Losses can occur when values of assets and liabilities or revenues are adversely affected by changes in market conditions, such as interest rate or foreign exchange movement which influence the development of profits.