The Sixteenth Annual Analysis of Canada’s Largest Credit Unions based on 2018 Audited Financial Statements provides extensive financial comparisons between credit unions, chartered banks and financial institutions includes asset growth and profitability, deposit and loan portfolio, operating results, capital ratios. The Analysis provides an overview of the Credit Unions’ participation in the mutual fund and on-line brokerage industries.

The 2018 initial report includes 137 credit unions compared to 148 credit unions in the final report last year. The 137 credit unions represent 94.2% of the total movement’s assets compared to 96.3% in the previous year.

Membership

The credit union system membership (not including the Caisses Populaires) has increased by 5.99% to 5,797,696 in 2018. The membership of largest credit unions in my study represents approximately 90.6% of the total membership of CU Movement. The membership of the credit unions and the caisses populaires has grown by 2.2% in 2018.

Blue Shore Financial Credit Union located in North Vancouver, British Columbia $94,193 assets per member, the largest of any credit union in Canada. (see Schedule 27 for more details).

Assets

The continued consolidation of the movement* has resulted in the 10 largest credit unions accumulating assets of $116.0 billion representing 50% of total assets of the movement.

The 10 largest credit unions grew at 10.2% which was greater than the largest credit union’s growth of 6.0% and greater than the total CU movement’s growth of 8.3%.

The asset growth of the 137 largest credit unions in 2018 was 6.0% compared to 7.2% in the previous year. The growth of the movement’s assets was 8.3% in 2018 compared to 6.8% in the previous year.

Asset Growth and Return on Assets

The Province of British Columbia has largest asset base of credit union movement in Canada (not including Quebec) with $82.1 billion in assets and saw their assets grow by 7.8% in 2018 compared to 7.2% in the previous year. The province of Ontario with next largest asset base of $49.6 billion saw asset growth of 11.3% growth compared to 11.3% in the previous year.

The western based credit union were the most profitable, with Saskatchewan Credit Unions being the most profitable with an average a return of assets (ROA) of 0.76% and Alberta Credit Unions with a ROA of 0.70%. (see page 54).

Four credit unions experienced strong assets growth in 2018 (over 20%) – Compass Credit Union (formerly Crocus) located in Brandon, Manitoba’s assets grew by 42.3% primarily due to the merger between Crocus Credit Union and Erickson Credit Union in 2017; Connect First Credit Union (formerly First Calgary) in Calgary Alberta experienced growth of 26.3% in assets primarily due to the merger with Legacy Savings & District credit union on November 1, 2017; Sunova Credit Union located in Selkirk, Manitoba experienced growth of 26.3% in assets primarily due to a merge with Oak Bank Credit union; and DUCA Credit Union located in Toronto, Ontario experienced organic growth of 21.5% in assets. (see Schedule 12 for more details)

Vision Credit Union in Camrose, Alberta with assets over a $1 billion had the privilege of having the highest return on assets (ROA) of 1.50% in 2018. Two other much smaller credit unions had ROA of over 1.20% – St. Gregor Credit Union located in St. Gregor, Saskatchewan had a ROA of 1.28% and Dodsland and District Credit Union located in Dodsland, Saskatchewan had a ROA of 1.20%. (see Schedule 14 for more details)

Number of Credit Unions

The number of credit unions in the system declined by 11 credit unions primarily due to mergers and amalgamations from 261 in 2017 to 250 in 2018.

Number of Branches

While, the number of branches increased from 1,722 in 2017 to 1,775 in 2018. The caisses populaires has seem their branch number decline in the last five years, primarily due to a concerted effort to amalgamate smaller caisses populaires.

Servus Credit Union, located in Edmonton Alberta has the largest branch network of 102 branches (see Schedule 26). See Schedule 25 which ranks the credit unions by deposits per branch – of the top 5 there was one credit union with less than 5 branches – Steinbach Credit Union located in Steinbach, Manitoba (3 branches -$1.77 billion in deposits); the next two credit unions with major branch networks had the largest deposits per branch – Vancouver city Savings Credit Union located in Vancouver, BC with 59 branches – $327.4 million per branch and Coast Capital Savings Credit Union located in Surrey, BC with 52 branches – $312.5 million in deposits per branch.

Auditors

Only eight credit unions are being audited by auditor firms that have one large credit union as their audit client. The remaining credit unions are being audited by 17 different major audit firms. KPMG LLP has 19 (compared to 20 last year) audit clients representing 39.4% (compared to 41.5% last year) of the assets of the largest credit unions in Canada. MNP LLP has the largest number of audit clients at 41 (compared to 39 last year) representing 10.6% (compared to 10.9% last year) of the total assets of the largest credit unions in Canada. (see Pages 13 to 22 for more details)

Community Donations and Sponsorships

In my analysis, the community donations and sponsorships also includes marketing costs which in many cases are directed and support community publications and events.

In 2018, 112 of the largest credit unions in Canada contributed $107.9 million to donations, sponsorships and marketing programs an increase of 25.8% from the previous year. In 2017, the 115 of the largest credit unions in Canada contributed $91.7 million.

In 2017, 9.0% of the largest credit unions pre-tax income went to community donations, sponsorships and marketing programs. Approximately, 2.74% of the operating costs in 2018 were allocated to community donations, sponsorships and marketing programs.

Credit unions in three provinces provided more than 3% of their operating expenses for community sponsorships, donations and marketing activities – Province of Ontario provided $31.5 million for these activities representing 3.76% of their operating expenses (highest); Atlantic Provinces provided $7.0 million for these activities representing 3.25% of their operating expenses; and Province of British Columbia provided $51.0 million for these activities representing 3.13% of their operating expenses. This is significantly higher than the approximately 1% provided by the Canadian Chartered Banks. (see Pages 23 to 28 for more details)

Loan Portfolio

The credit union’s loan portfolio is primarily focused on providing Residential Mortgage loans for its members representing 60% of the total loan portfolio. Overall the growth in lending slowed in 2018; the credit unions saw growth of 5.0% in 2018 compared to 9.9% in 2017. The Residential Mortgage loans grew by 3.4% in 2018 compared to 10.2% in 2017.

Commercial Mortgage loans had increased to 27.3% of the portfolio compared to 26.2% in 2014 (5 years ago), while consumer loans had decreased to 7.2% of the portfolio compared to 9.1% in 2014. Commercial Mortgage loans grew by 5.1% compared to 13.5% in 2017 and the consumer loans increased by 0.5% compared to 4.6% in the previous year.

Agriculture and Business loans have remained fairly stable and now represent 3.5% and 2.3% of the loan portfolio. (see Schedule 2 for more details) Pages 55-61.

Ontario Provincial Police Credit Union located in Barrie, Ontario had the largest residential mortgage portfolio representing 93.5% of its total loan portfolio in 2018. (see Schedule 38 for more details) Page 199

Kindred Credit Union located in Kitchener, Ontario had the largest commercial mortgage portfolio representing 68.6% of its total loan portfolio in 2018. (see Schedule 36 for more details). Page 197

Kindred Credit Union located in Kitchener, Ontario also had the largest agriculture loan portfolio representing 47.5% of its total loan portfolio in 2018. (see Schedule 35 for more details). Page 196

Eagle River Credit Union located in L’Anse au Loop, Newfoundland had the largest consumer loan portfolio representing 27.0% of its total loan portfolio in 2018. (see Schedule 40 for more details). Page 201

Loan portfolio – allowance and impaired loans

Overall the allowance for doubtful loans has increased by 25.0% and now represents 0.30% of the loan portfolio which is still quite low compared to 2010 when it was 0.51 of the loan portfolio. Saskatchewan and the Atlantic credit unions have the largest allowance ratios of 0.58% and 0.65% respectively.

Overall the impaired loans as a % of total loans increased to 0.53% compared to 0.43% in the previous year, again, this is significantly below the 0.99% in 2010. Though this a significant increase and does raise a concern about the deterioration of the credit union loan portfolio. Again, Saskatchewan and the Atlantic credit unions have the largest impaired loan ratios of 1.55% and 1.28% respectively. (see Schedule 2a for more details) Pages 61-67

Loan Portfolio – Insured Mortgages

The largest credit union’s insured mortgage loan portfolio (only 67credit unions reported these figures), stood at $16.5 billion representing 27.5% of the residential mortgage portfolio compared to 33.3% for the large Canadian domestic banks. The insured mortgages as a % of total residential mortgages declined slightly in the last year probably due to the new restrictive regulations issued by the Federal government and CMHC. Saskatchewan and the Atlantic provinces had the largest % of their residential mortgages insured having 41.1% and 50.5% insured by CMHC and Genworth respectively. Saskatchewan saw a 3.1% increase in their insured mortgages.

The Canadian Chartered banks have seen their insured mortgages decline by 7.9% in 2018 compared to a decline of 4.4% in 2017. Insured mortgages now represent only 33.3% of the residential loans portfolio compared to 56.1% in 2013. The recent changes by CMHC to the insured mortgage program have affected the growth of insured mortgages in the financial services industry in Canada.

Deposit Portfolio

Interestingly in this low interest environment, the credit unions have been able to attract demand deposits which represent 43.9% of the deposit portfolio, while term deposits represent 39.4% and registered plans represent 16.7%. The recent increases interest rates have resulted in the average cost of deposits increasing to approximately 1.60% in 2018 compared to 1.35% in the previous year. (see Schedule 3 for more details)

Borrowings

Approximately 87% of the borrowings in the credit unions relate to securitized mortgages. The securitized mortgages grew by 20% compared to 9.5% growth in the previous year and now total $14.5 billion. Securitized mortgages have become another funding source for credit unions helping them to meet the residential mortgage demand of their members.

Operating Results – Net Interest Margin and Operating Expenses

Overall the credit unions net interest margin increased to 2.09% compared to 2.05% in the previous year. Saskatchewan and the Atlantic Province credit unions have relied on a higher than average net interest margin and higher other income to cover their higher operating costs.

Saskatchewan had a net interest margin of 2.67%, other income ratio of 0.86% of average assets totalling 3.53% operating income ratio. The operating expenses ratio was 2.34% the second highest of all of provinces.

Atlantic Provinces had a net interest margin of 2.51%, other income ratio of 1.25% of average assets totalling 3.75% operating income ratio. The operating expenses ratio was 3.16% the highest of all of provinces.

Overall the operating expense ratio has continued to decline and is now 2.01% compared to 2.05% in the previous year. Manitoba and Ontario have the lowest operating expense ratios of 1.39% and 1.97% respectively.

Overall the loan loss provision has increased slightly to 0.09% of average loans compared to 0.07% in the previous year, but has remained below 0.10% for the last eight years. (see schedule 4a for more details).

There were two credit unions that had lowest operating expense ratios, both below 0.90% of average assets – Rosenort Credit Union located in Rosenort, Manitoba with assets of $519 million had an operating expense ratio of 0.82% and lowest productivity expenses ratio of 36.1%; Crosstown Civic Credit Union located in Winnipeg, Manitoba with assets of $2.4 billion had an operating expense ratio of 0.84% and had the second lowest productivity ratio of 47.6%. (see schedule 18 for more details). Page 178.

Operating Results – Analysis of Operating Expenses

Overall the operating expense ratio has continued to decline and is now 2.01% compared to 2.05% in the previous year. Another measure of operating efficiency is the productivity ratio (operating expenses as a % of operating income) which has been declining steadily since 2015. The productivity ratio declined to 73.0% compared to 75.4% in the previous year. The operating expenses increased by 2.2% in 2018 compared to 4.9% growth in the previous year.

Salary and personnel costs only grew by 0.8% compared to 5.3% in the previous year, resulting in salary and personnel costs representing 1.12% of average assets compared to 1.16% in the previous year. Saskatchewan and the Atlantic Province credit unions have the highest salary and personnel costs ratios of 1.30% and 1.59% respectively. While, Ontario and British Columbia have the lowest salary and personnel cost ratios of 1.12% and 1.19% respectively. (see Schedule 5 for more details).

First Credit Union located in Powell River, British Columbia had the lowest salary and personnel cost per employee of $35,974. (see Schedule 30 for more details). Page 191.

Capital Ratios

Credit unions rely on profitability to grow their capital. The majority of the movement’s total capital is in retained earnings, only 21.7% of total capital was represented by memberships and equity shares in 2018 compared to 22.8% in the previous year. Capital ratios are affected by balance sheet growth, profitability and the retention of the profitability. The movement retains a portion of its annual income to satisfy its capital plans. The remainder of the net earnings are allocated to its members through the movement’s patronage program.

Total capital of the largest credit unions stood at $15.4 billion, which represented 7.03% of its assets compared to 7.07% in 2017. This decline is due to assets growing faster than capital, assets grew by 8.5%, while capital increased by 7.8% in 2018.

The largest credit unions returned $204.5 million to its members by way of dividends and patronage payments, which represented 18.5% of its net income in 2018 compared to 22.4% in the previous year.

The best capitalized credit unions are in the Province of Alberta which had a capital to assets ratio of 9.34% and the next best capitalized credit unions were in Alberta with a capital ratio of 8.79%. (see Schedule 6 for more details) Pages 106-111.

Lakeland Credit Union located in Bonnyville, Alberta had the highest ratio of member’s shares and capital to assets of 15.06% in 2018. (see Schedule 31 for more details) Page 192

Restricted Party Loans

The restricted party loans are loans to staff and member of the Board of Directors. The total restricted party loans ratio ranged from 0% to a high of 5.76% (Minnedosa Credit Union, located in MInnedosa, Mantoba).

In 2018, the average ratio for the 107 credit unions, which disclosed their loans held by restricted parties, was 1.24% of the total loans outstanding.
In 2017, the average ratio for the 123 credit unions, which disclosed their loans held by restricted parties, was 1.41% of the total loans outstanding.

The directors & employees of the credit unions in Province of Alberta continue to be the most supportive of their credit unions and have restricted loans outstanding representing 2.06% of the total loans compared to 2.39% last year, followed by the credit unions in British Columbia with a ratio of 1.72% of net loans. (see Schedule 7 for more details) Pages 112-118.

Directors Remuneration and Expenses

Total remuneration and expenses paid to members of the board of directors ranged from $nil to about $786,000 (Servus Credit Union with its head office located in Edmonton, Alberta). The director remuneration and expenses per director ranged from $nil to as high as $73,000 (Libro Credit Union with its head office located in London, Ontario).

In 2018, the average remuneration and expenses per director was $17,051 for the 109 credit unions, represented by 1,084 directors, which disclosed this information.
In 2017, the average remuneration and expenses per director was $14,829 for the 123 credit unions, represented by 1,211 directors, which disclosed this information.

In 2018, the average remuneration per director for 109 credit unions, which disclosed this information, was $13,180 per director compared to $11,132 in the previous year.

The 28 Credit Unions in British Columbia, which disclosed their director’s fees and expenses, had paid average highest fees of $16,383 per director and highest total fees and expenses of $20,742. (see Schedule 8 for more details) Pages 119-125.

Disclosure Regulations-Key Management Compensation

Key Management Compensation paid to the management team ranged from 2.45% of the total personnel costs (Servus Credit Union in Edmonton, Alberta) to 56.81% of the total personal costs (St. Gregor Credit Union in St. Gregor, Saskatchewan).

In 2018, the key personnel compensation was 8.64% of the total personnel expenses for the 102 credit unions, which disclosed this information.
In 2017, the key personnel compensation was 8.28% of the total personnel expenses for the 119 credit unions, which disclosed this information.

The eighteen credit unions in the Province of Manitoba had the highest level of key management personnel costs relative to total personnel cost of 14.94%. (see Schedule 8a for more details) Pages 126-132.

Loan Commitments

In audited statements, the credit unions are required to disclose the loan commitments made to members that need to be funded in the following year. In addition, the credit unions are required to disclose the total commitment to extend line of credit loans. These disclosures are considered to be off-balance items.

Overall, the credit unions agreed to lend $14.3 million to their members, which represent 9.4% of the total portfolio compared to 9.0% in the previous year. The total level of approved lines of credits for credit union members was $20.6 million representing 15.7% of the existing loan portfolio.

The credit unions in the Province of Alberta had the highest level of pre-approved loans that would be funded in the next year of $4.3 million representing 19.4% of the existing loan portfolio.

The credit unions in the Atlantic Provinces had the highest level of lines of credit exposure representing 20.2% of the existing loan portfolio. (see Schedule10 for more details). Pages 145-149.

Liquidity Analysis

One definition of liquidity is the level of total investments relative to total deposits. This liquidity ratio increased to 15.6% from 15.1% in the previous year. The liquidity for the credit unions has exceeded 15% over the last four years.

The credit unions in the Province of Saskatchewan had the highest level of liquidly of 19.5%. (see Schedule 11 for more details). Pages 150-154.

Investments in Central Shares

The largest credit unions in Canada have invested $1.1 million in Central shares in 2018 representing 4.73% of the total investments compared to 4.67% in the previous year.

The credit union in the Province of Alberta have the highest level of investments in their Central of approximately 9.36% of their total investments. (see Schedule 11a for more details). Pages 155-160.

Risk Adjusted Capital Ratios

Risk-adjusted capital ratio is used to measure the credit union’s ability to continue functioning in the event of an economic downturn. It is calculated by dividing the credit union’s total adjusted capital by its risk-weighted assets.

The greater the institution’s capital, the higher its capital ratio, which should translate to a higher probability that the entity will remain stable in the event of a severe economic downturn.

The largest credit unions in Canada saw their risk-adjusted capital ratio increase to 14.0% from 13.72% in the previous year. The six largest Chartered Banks in Canada had risk-adjusted capital ratio of 15.13% in 2018 compared to 14.74% in the previous year.

The credit unions in the Province of Alberta had the highest average risk-adjusted capital ratio in Canada of 16.11% compared to 15.88% in the previous year. Next best were the credit unions in the Atlantic Provinces which had a risk-adjusted ratio of 15.47% compared to 15.40% in the previous year. (see Schedule11b for more details). Pages 161-166.

Lakeland Credit Union located in Bonnyville, Alberta had the highest risk-adjusted capital ratio of 29.90% in 2018. (see Schedule 33 for more details) Page 194.

Fixed Asset Analysis

The largest credit unions in Canada invested $1.6 billion in land and buildings which represented 42% of the total fixed assets and 0.80% of the total assets. The largest credit unions also invested $909 million in technology assets which represented 23.5% of the total fixed assets and 0.46% of the total assets.

The level of investments in land and buildings and technology as a % of assets has not changed very much over the last four years. (see Schedule11c for more details). Pages 167-171

*Definition: “movement*” or” system*” in this report does not include the financial results of caisses populaires system in Quebec, Ontario, Manitoba and New Brunswick.