The Voice of Canadian Credit Unions
Banking / Mergers /  •

Creative Pursuits

As an increasingly competitive financial landscape threatens margins, credit unions across the country are finding new ways to streamline operations and cut costs.

Dwight Bunyan says business is great at LeRoy Credit Union (1,335 members, $112 million in assets) and, like several smaller credit unions in Saskatchewan, his organization is in a sweet spot with little competition, healthy profits and growing assets.

But the general manager knows his credit union, located in a town of 425 residents about 200 kilometres north of Regina, can’t afford to hope that the turmoil sweeping the system will pass it by. “We have been fortunate in this province that there are a lot of single or two-branch credit unions that are in a real sweet spot around the $100 million mark,” Bunyan says. “We’re able to enjoy lots of efficiencies and we’re big enough to buy the technology. We don’t want to change. We come out of our boardroom and we’re having a ball.

“We just don’t know how much longer we can stay in this sweet spot. In 10 years we’ve gone from $34 million to $120 million in assets; if that happens again in 10 years we’re out of the sweet spot,” Bunyan says.

Jody Burk, CEO of East Kootenay Savings & Credit Union (11,000 members, $314 million in assets) has a similar view of the credit union landscape. “Some single branch credit unions are very profitable and doing well but multi-branch credit unions are struggling with costs and revenue,” Burk says. “They have to change. You can only cut so far, you can only cut staff, community investment, or marketing so far. Whatever you cut you are diminishing your brand by doing that.”

Bunyan knows that as his credit union grows it will require more staff and overhead that will cut into profits and — possibly — eventually place it in danger. But he hasn’t been sitting waiting for change to hit him. For the past eight years Bunyan has been involved in a wealth management partnership with other credit unions that has made it possible to provide services he couldn’t on his own, at a low cost.

Now he’s looking hard at an even bigger change. “Our intention is to grow and we’ll climb out of that sweet spot. That’s why we’re looking at a multi-brand merger. It is a very good way to merge the back office and still remain, not autonomous, because there is a merger, but you can still retain your brand and retain your member experience. Unlike a single brand merger.”

Credit unions and the bifurcation burn

In 2012, a report by Deloitte taught credit union executives the word bifurcation. It meant that the Canadian system was splitting into two groups: a few large credit unions and a handful of niche players. Credit unions that didn’t fit into either group were urged to find merger partners, advice that has helped spur a wave of mergers, particularly in Ontario where the number of credit unions has gone to 72 from 90 in just three years. “This idea of merger, merger, merger into a bigger credit union — everyone almost had blinders on and thought that was the only way, that’s what you do, but it has created its own set of problems that have got almost out of control,” Bunyan says. “Now, everyone is thinking, ‘Well, I don’t want that.’ ”

“Many of my colleagues have looked down the tunnel of the future with a fair amount of trepidation. I know that the collaborative units give them far more confidence about their ability to survive.” – Shelley McDade

One other option pioneered by First West Credit Union (216,000 members, $9 billion in assets) was the creation of divisions based upon credit unions it had undertaken mergers with. This included Envision Financial, Valley First, Island Savings and Enderby & District Financial, which allowed the institutions to keep their branding while joining forces to share services and staff.

This was also the approach taken by Connect First Credit Union (100,000 members, $4 billion in assets), which brought together First Calgary and Chinook Financial.

In Ontario, Alterna Savings Credit Union (130,000 members, $3.2 billion in assets) has taken the lead in this federated approach with its alliance in January 2016 with Peterborough Community Savings Credit Union, which now operates as a division of Alterna. It took a similar step this past December when Nexus Community Credit Union joined the fold to become Nexus Community Savings. Nexus Community had been created less than a year earlier on Jan. 1, 2016 by merging with Northern Lights Credit Union and Thamesville Community Credit Union.

When many credit union boards and senior executives look to the future of their organizations they see trouble: little profit and rising costs. “Currently credit unions are in a very low financial margin market,” says Burk of East Kootenay Savings. “Costs are increasing, so we have pressure from revenue going down and costs going up. We thought this was just a bump but this is our new reality and we have to manage and work in this environment.”

Burk sees other challenges too: regulatory pressure and scarce management skill. “Management expertise is retiring; we have Baby Boomers with a lot of expertise who are retiring,” he says. “They are hard to replace, or very costly to replace. Millennials don’t want to work this way, or aren’t interested in advancement.”

Burk says his board has considered mergers in the past. However, “our board feels that we have a lot to offer as an independent credit union and that we can address our local and regional issues better than a larger merged credit union would.”

How does a credit union decide what’s best for its future if it can’t go it alone? How does it decide whether to merge, federate or collaborate?

Credit union consultant Kim Andres says Eckville District Savings & Credit Union (2,300 members, $95 million in assets) in Alberta developed a roadmap that others would find useful. Realizing it needed to partner with another credit union in order to serve a large and growing agricultural sector, Eckville’s board developed a series of questions for potential partners and then sent them to organizations it thought might be interested.

After analyzing the responses and some further questioning, Eckville decided the best option was to merge with Mountain View Credit Union (15,000 members, $645 million in assets). Eckville executives initially considered keeping their brand but in the end decided that the Mountain View name worked equally well for it.

Andres describes the Eckville approach as a progressive, offensive move designed to let it better serve a new market. “Eckville didn’t need to follow the new market, it didn’t need to do any of those things but it knew the community would be better served if it had access to those resources,” Andres says. “It was a very process and science-based exercise, rather than what a lot of mergers are, which is kind of emotional.”

Andres adds that she is getting calls from other credit unions to talk to their boards about what Eckville did. “They didn’t just sit passively and say, ‘We’ll say yes to the next offer that comes before us.’ What they said was, ‘We’ll drive this, we’ll go out and ask other credit unions if they’re interested.’ ”

Andres jokes that part of her role as consultant is to play matchmaker. “It’s almost like a dating service. Sometimes a credit union picks a candidate that has no interest in merging. I see credit unions talking to each other where it is clear that one of them is just not interested.”

Uncertainty around tier changes

One of the drivers for change today is uncertainty around changes at the system’s second tier — the provincial and regional centrals. Many smaller credit unions are concerned about what services will be available from centrals in the coming years and at what costs. Many are deciding it’s better to seek other partners now to reduce the risk of losing services.

Burk agrees that credit unions need to be aware of the changes in the works at the second tier. “Large credit unions have a plan and they are pushing the centrals in that direction and the small and medium credit unions have to look and say, ‘OK, what are we going to be doing?’ ”

A recent report by consultants at the entrepreneurial firm MNP says: “Shifting structures and evolving centrals will force credit unions to reassess the most efficient way to source back-end and front-end services. For the smaller cooperatives, if access to services is threatened, they will need to consider whether to partner with a larger player or an external supplier.”

Shelley McDade, CEO of British Columbia’s Sunshine Coast Credit Union (16,000 members, $530 million in assets) is the self-described apostle of credit union collaboration. “I am a bit of a zealot when it comes to this topic,” McDade says. “I think that collaboration is the one tool that we can all put in our kit and deliver the kind of experience that our members deserve, while remaining independent.” McDade is certainly following her own advice. Sunshine is involved in collaborations with 21 different credit unions “on a variety of topics and functions.

“Many of my colleagues have looked down the tunnel of the future with a fair amount of trepidation. I know that the collaborative units give them far more confidence about their ability to survive.”

Some collaborations are simply based on a letter of understanding between the partners, while others require establishing a separate company. “In the case of Sunshine Coast what’s sacred to us is our relationship with our members and our relationship with our community; we believe those are two elements that can’t easily be replicated in a competitive market,” McDade says. “So we’re pretty willing to talk about anything else and that leaves me the freedom from a governance standpoint and a leadership standpoint to enter into these dialogues and know where I can and can’t go.”

Collaboration gaining ground

Other credit unions are certainly interested in the idea. Joel Lalonde, CEO of Your Credit Union (11,500 members, $260 million in assets) saw the benefits of collaboration up close in his previous job with Desjardins Group (seven million members, $260.7 billion in assets), which combined the back-office operations of 14 caisses populaires in one Ottawa office. Now Lalonde is starting down that route with his credit union. “Your Credit Union and Kingston Community Credit Union have been conversing about the creation of a wealth management credit union service organization (CUSO),” Lalonde says. “It could mean joining an existing wealth management CUSO, such as the one in BC or Saskatchewan, or it could mean creating our own. We have reached out to all CEOs in the province and have received some signs of interest from other parties as well. We’re looking at creating a road map leading us to a healthy debate, conversation and hopefully a decision-making process by spring of this year.”

Lalonde prefers collaboration because “it allows for the true meaning of credit unions — community-based institutions — to not only survive but to thrive locally.

“I haven’t found another path,” Lalonde adds.“Mergers certainly satisfy some of the core expectations of scale but there are some side effects if it’s not managed properly that you can’t reverse. You can lose the community focus and community brand and connection to the people in the community. I’m not willing to take that risk; I’d much rather work on collaboration with other like-minded credit unions.”

For his part, Bunyan says this is a time of opportunity for credit unions like LeRoy. “It doesn’t have to be doom and gloom all the time. If you’re doing something that is going to be beneficial to your members it’s a good thing.” ◊