Management Discussion and Analysis Introduction.................................................................................................................................................... 1 Economic Environment in 2014 .................................................................................................................... 1 Performance Highlights ................................................................................................................................. 2 Lines of Business Performance .................................................................................................................... 2 Principal Risks ............................................................................................................................................... 3 2015 Outlook ................................................................................................................................................. 5 Compensation Discussion and Analysis ....................................................................................................... 5 Board of Directors Compensation ............................................................................................................. 5 Executive Compensation ........................................................................................................................ 11 Introduction North Shore Credit Union (the Credit Union), doing business as BlueShore Financial, is a boutique financial institution providing a full range of personal and business banking, wealth management, insurance and commercial lending solutions. The Credit Union has 12 branches across Greater Vancouver and the Sea-to-Sky Corridor and administers over $3.5 billion in Assets Under Administration. As one of Canada's “50 Best Small and Medium Employers” for four consecutive years, the Credit Union is proud of an organizational culture that is client-focused, results-driven, supportive and inclusive. This Management Discussion and Analysis contains information designed to provide a more complete understanding of the Credit Union and its financial and operating performance. This discussion is intended to complement our audited consolidated financial statements and should be read in conjunction with those financial statements. Economic Environment in 2014 The Canadian economy began slowly in 2014 but picked up momentum in the second quarter, underpinned by the growth surge in the US. Initially driven by a strong rebound in the housing sector, the US recovery became more broadly based during the year. By contrast, the Euro Zone and Japan continued to struggle and emerging markets slowed their pace of growth. Stimulatory monetary conditions remained in place in most advanced economies and concerns about deflation in Europe resurfaced. The second half plunge in the oil price, on top of falling commodity prices generally, caused a repointing of most economic growth forecasts for the year. While the oil price decline is expected to have a positive effect globally, for net oil exporters like Canada the economic and exchange rate impact will be negative. Despite being stimulatory for exports, the weaker Canadian dollar is not expected to offset the negative impact of the oil price reduction. Economic growth in Canada is now estimated to be approximately 2.4% in 2014 (2.0% in 2013). Throughout 2014, interest rates remained at record low levels. The US Federal Funds rate and the Bank of Canada rate continued unchanged. Mortgage rates, however, eased to the downside as competition 1 for home loans intensified. As expected, the US brought its quantitative easing program (QE III) to an end in October and began to signal a possible increase in rates, starting mid-2015. Any upward shift in rates for Canada is now looking more remote, after the recent cut by the Bank of Canada and with excess capacity in the Canadian economy likely to persist into 2016. Continued stimulatory conditions should be positive for housing and mortgage demand, although elevated household debt levels remain a curbing influence. Performance Highlights Overall the Credit Union’s On Balance Sheet Assets increased $384 million (a gain of 16.3%) with Assets Under Administration totaling $3.5 billion ($3.1 billion in 2013). Total loans grew by $225 million (up 10.9%) while deposits increased by $376 million (up 17.8%). Net Interest margin was adversely impacted by the continued low interest rate environment and flat yield curve. Competition for mortgages remained intense but concentrated sales efforts achieved notable market share gains. Non-interest income was favourably affected by the gain on sale of the Credit Union’s old head office and a market leading wealth management performance. Offsetting this to some extent were the costs of moving to the new Head Office and a slightly lower level of other fee income. Net Operating Income (NOI) of $14.2 million significantly exceeded the previous year’s $10.1 million. Return on Retained Earnings (RORE) was 11.6% (9.3% in 2013) and Return on Average Assets (ROAA) was 55 basis points (44 basis points in 2013). Lines of Business Performance Core Banking 2014 was another strong year in which deposit, lending and wealth performance met or exceeded aggressive growth expectations. A client benchmark study was conducted through Ipsos Reid this past year with results that were overwhelmingly positive for the Credit Union. Clients rated the Credit Union higher in almost every category in comparison to how clients of other Financial Institutions rated their own institution. Clients feel strongly that the Credit Union improves their overall financial well-being, is pro- active in contacting them, and are expert providers of financial advice. As well, Mystery shop results remained strong confirming once again the Credit Union’s ability to deliver a high quality consistent experience. Wealth Management Wealth Management had a strong year from both investment business and insurance business. The investment line had strong overall asset growth of $81.6 million, and rose to $617 million in Assets Under Administration. The increase was made up of $49.6 million in net sales and $32 million in market appreciation. While market volatility tempered market appreciation towards the end of 2014, net sales continued to outpace 2013 levels. Insurance revenue exceeded objectives as a result of the Credit Union’s advisory team increasingly identifying sophisticated estate planning, wealth protection and tax minimization opportunities for both individual and business clients. Referrals from retail branches grew significantly in 2014 and this is expected to continue in 2015. 2 Business Group The Business Group, in conjunction with branch Financial Advisors, coordinates the deposits, lending, insurance and wealth management needs of business clients. This advice based group continued to successfully service and be well received by both new and existing business clients. One consistent message from clients is that they are choosing the Credit Union as a strategic partner because of its customized service and “ease of doing business”. BlueShore Leasing BlueShore Leasing provides financing to small and medium size businesses in both B.C. and Alberta. The division finances equipment involved in manufacturing, construction, transportation and oil and gas site servicing sectors. It also provides pre-construction and post construction strata financing for items such as intercoms and boilers. BlueShore Leasing holds a diversified portfolio, broadly based over multiple industries and equipment types. At the end of 2014 it had a lease portfolio balance of $67.3 million, consisting of approximately 1100 individual equipment leases with an average duration of 3-years. In 2014 it had a record year, funding $45 million in new financings and adding $16.1 million in net loans to its portfolio. Real Estate (Commercial) The BlueShore Financial Real Estate Lending Group is comprised of an experienced group of individuals that sources, underwrites, funds and administers commercial mortgages focused mainly in the Greater Vancouver/Lower Mainland region. The Group manages a commercial mortgage portfolio that has grown to approximately $756 million and has underwritten and funded over $1.2 billion in new loans over the last five years. Commercial mortgage financing includes income producing properties such as retail, office, and industrial. The Group also manages a construction portfolio which finances single family, townhome, apartment buildings, as well as multi-family and mid-rise condo projects. In 2014, the Real Estate Lending Group achieved its growth targets for the year and is gearing up for a productive 2015. Principal Risks The Credit Union’s principal business activities result in a consolidated balance sheet that consists primarily of financial instruments. In addition, the Credit Union uses derivative financial instruments for asset/liability management purposes. The principal financial risks that arise from transacting financial instruments include credit, liquidity, and market risk. The Credit Union’s risk management policies are established to set appropriate risk limits and controls. Management’s responsibility is to identify and analyze the risks faced by the Credit Union and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions, products and services offered, and changes in portfolio performance