Morningstar DBRS Maintains Under Review With Developing Implications Status on Coast Capital Savings Federal Credit Union's Credit Ratings, Including Long-Term Issuer Rating of BBB (high)

DBRS Limited (Morningstar DBRS) maintained the Under Review with Developing Implications status on all the credit ratings of Coast Capital Savings Federal Credit Union (Coast Capital or the Credit Union), including the Credit Union's Long-Term Issuer Rating of BBB (high) and Short-Term Issuer Rating of R-1 (low). The credit ratings were placed Under Review with Developing Implications on April 8, 2025, following the Credit Union's announcement on April 3, 2025, that it intends to merge with Prospera Credit Union (Prospera) and Sunshine Coast Credit Union (Sunshine). Coast Capital's Long-Term Issuer Rating is composed of an Intrinsic Assessment (IA) of BBB (high) and a Support Assessment of SA3, which reflects no expectation of timely systemic support. As a result, the Credit Union's Long-Term Issuer Rating is equivalent to its IA.

KEY CREDIT RATING CONSIDERATIONS
The Under Review with Developing Implications designation continues to reflect Morningstar DBRS' view that there is insufficient information to properly assess the proposed merger's implications for Coast Capital's credit ratings. Once additional information on the post-transaction credit profile becomes available, Morningstar DBRS will evaluate the transaction's impact on the Credit Union's operating model, financial performance, risk profile, funding and liquidity, and capitalization. Completion of the transaction is still subject to member approvals by the credit unions and required regulatory approvals. Following the planned merger, the combined credit union is expected to have more than $38.6 billion in assets under administration; 2,500 employees; 730,000 members; and 70 branches across British Columbia (BC or the Province; rated AA (high) with a Negative trend) on the Lower Mainland, Vancouver Island, the South Sunshine Coast, and the Okanagan.

The credit ratings reflect Coast Capital's strong franchise in its main footprint area in the lower mainland of BC, with its member base of 603,000 representing 11% of the provincial population in 2024. Furthermore, the Credit Union's funding and liquidity position remains good, comparable with other credit union peers. The credit ratings also consider Coast Capital's weakened profitability and credit quality metrics, amid a challenging operating environment, although credit quality has historically been good and delinquencies remain manageable.

Morningstar DBRS is also concerned about the trade conflict between the U.S. and Canada and ongoing uncertainty related to specific tariffs on industries crucial to the Canadian economy, and to BC in particular, where Coast Capital has concentration risk of operating primarily in the Greater Vancouver Area along with a relatively large construction exposure, which makes it more susceptible to a potential real estate market correction. U.S. tariffs, and reciprocal Canadian tariffs, could result in a combination of economic recession, rising unemployment, and pockets of higher inflation in Canada that could further negatively affect Coast Capital's profitability and asset quality.

Coast Capital's IA of BBB (high) has been assigned at the midpoint of the Intrinsic Assessment Range, as Morningstar DBRS views the Credit Union's credit fundamentals and performance as commensurate with those of similarly rated peers.

CREDIT RATING DRIVERS
When sufficient detailed information is available, Morningstar DBRS may take one of the following actions:

If Morningstar DBRS believes that the merger would not lead to a credit rating change, it would confirm the current credit ratings with Stable trends and would remove the Under Review with Developing Implications status.

If Morningstar DBRS views the completion of the potential merger as having a material positive and sustainable impact on Coast Capital's credit profile, it would place the credit ratings Under Review with Positive Implications.

If Morningstar DBRS views the completion of the potential merger as having a material negative impact on Coast Capital's credit profile, it would place the credit ratings Under Review with Negative Implications.

CREDIT RATING RATIONALE
Franchise Combined Building Block Assessment: Good/Moderate
Coast Capital is the second-largest credit union in BC by total assets, with $21.9 billion in assets as at year end 2024. The Credit Union serves approximately 11% of the provincial population through 45 branches in BC that offer a retail and small business commercial product suite. The Credit Union also has both a growing digital presence and a national presence through its commercial leasing subsidiaries: Coast Capital Equipment Finance Ltd. and Coast Capital Auto & Equipment Finance Ltd. Coast Capital's planned merger with Prospera and Sunshine is expected to result in the combined entity having increased scale and enhanced digital banking technology and tools, potentially benefiting members and businesses with any future expansion outside BC. Completion of the transaction is expected to be in early 2026.

Earnings Combined Building Block Assessment: Moderate/Weak
Coast Capital's earnings have been under pressure in recent years as a result of liabilities repricing faster than assets. In F2024, net income declined to $15 million from $58 million in the prior year, representing a return on assets of 0.07% compared with 0.27% in the prior year, according to Morningstar DBRS' calculation. Earnings were primarily affected by a considerable year-over-year (YOY) increase in provision for credit losses to $45 million compared with $10 million in the prior year, driven by higher delinquencies and write-offs with respect to the equipment finance portfolio amid a challenging environment within the North American transportation industry. Additionally, revenue further contracted by 0.3% YOY in F2024, driven by a decrease in net interest income which more than offset growth in noninterest income. The decrease in net interest income was driven by higher interest expense resulting from a change in deposit mix from lower rate demand deposits toward higher rate fixed-term deposits. Positively, supported by updated product offerings, noninterest income grew 7% YOY in F2024, and accounted for 24% of total revenue. The efficiency ratio increased to 86% in F2024 (as calculated by Morningstar DBRS), because of lower total revenue and we expect Coast Capital's efficiency ratio to further increase in the near term due to the merger-related expenses.

Risk Combined Building Block Assessment: Good/Moderate
The asset quality of the Credit Union remained good with loan losses at manageable levels. In F2024, Coast Capital continued to grow its loan book by 3.7% YOY to $19 billion, supported by a 9.1% YOY expansion in commercial loans, including equipment finance, as well as 1.2% YOY growth in residential mortgages. The deterioration of the gross impaired loans ratio to 0.66% in F2024 from 0.21% in the prior year was largely driven by the equipment finance portfolio, as underlying assets remained under pressure because of lower demand and continued increase in operating expenses, especially for the owner-operating trucking segment. Nonetheless, the equipment finance portfolio only accounted for approximately 5% of the total loan book as of December 31, 2024. Overall, Morningstar DBRS expects credit quality metrics to continue trending upward due to uncertainty in the macroeconomic environment from U.S. tariff threats and the trade war.

Funding and Liquidity Combined Building Block Assessment: Strong/Good
Coast Capital's funding remains resilient with prudent levels of liquidity, and unlike provincial credit unions, it has access to some of the Bank of Canada contingency liquidity programs. The Credit Union is funded largely through member-sourced deposits that Morningstar DBRS views as stable, with total deposits up 2.4% YOY to $18.5 billion in F2024 with the majority coming from retail members. The proportion of agency and institutional deposits has been decreasing modestly since Coast Capital began its transition to a federal charter in 2017. In addition, Coast Capital had around $1.5 billion in wholesale funding at the end of F2024, which included secured borrowing through the Canada Mortgage Bond program, deposit notes, short-term commercial paper, and subordinated debt.

Capitalization Combined Building Block Assessment: Good/Moderate
Morningstar DBRS views the Credit Union's capital levels as good with a sufficient cushion over regulatory minimums. Coast Capital's Common Equity Tier 1 ratio stood at 12.2% as at December 31, 2024. At this level, it provides the Credit Union with a CET1 capital cushion of $595 million over the minimum regulatory requirement to absorb potential losses in the stressed environment.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/454067.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
ESG Considerations had a relevant effect on the credit analysis.

Social (S) Factors

The following Social factor had a relevant effect on the credit analysis: Morningstar DBRS views the Social Impact of Products and Services ESG subfactor as credit positive for the credit ratings but it does not affect the assigned credit rating or trends. As a credit union, Coast Capital operates a membership-based community banking model where the social aspect of its activities strengthens its franchise. As a result, this factor is incorporated into the Credit Union's Franchise Strength grid grades.

There were no Environmental or Governance factors that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 4, 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

For more information on Morningstar DBRS' policy regarding the solicitation status of credit ratings, please refer to the Credit Ratings Global Policy, which can be found in the Morningstar DBRS Understanding Ratings section of the website: https://dbrs.morningstar.com/understanding-ratings

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are under regular surveillance.

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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