Credit Unions Eye the Big Time

Chris Catliff, CEO, BlueShore Financial | BCBusiness
CEO Chris Catliff oversaw the rebranding of North Shore Credit Union into BlueShore Financial.

With global banks vying for your money, the neighbourhood credit union is fast becoming a thing of the past. And with mergers and regulations paving the way for growth, distinctions between credit unions and banks are blurring

Hollywood has not produced a lot of movies about lending policy. But there is one, and it’s a classic. Whatever else it may be remembered for, Frank Capra’s It’s A Wonderful Life established the public image of the credit union taking on the evil titans of finance. Down at Bailey Building and Loan, George Bailey (Jimmy Stewart) explains to panicky depositors how their money has been invested in each other’s homes and businesses. Meanwhile Mr. Potter, the evil slumlord, is waiting to snap up properties and foreclose.

Notwithstanding all the ad campaigns featuring cute little fellows in bowler hats and promises that you’re richer than you think, this little drama could still function as a credit union advertising campaign. Mr. Potter is evil. George Bailey is good. Banks are owned by, and run for, the benefit of their shareholders; credit unions are non-profit co-ops owned by members. So join your friends and neighbours in the spunky little credit union down the street.

Just one thing wrong with that Hollywood picture. Your credit union may not be so little anymore. Mergers have created large institutions that bear little resemblance to George Bailey’s little loan shop—Vancouver City Savings Credit Union (Vancity) currently boasts $17 billion in assets and owns its own bank. Large credit unions like Coast Capital Savings Credit Union are moving into areas of corporate finance previously reserved only for banks, even as recent provincial guidelines demand credit unions increase their capital reserves to bank-like levels and replace community volunteers with boards made up of business professionals. Meanwhile new federal regulations will finally allow credit unions to break out of the provincial league and go national. Would all these changes make George Bailey want to jump off a bridge? Or are credit unions still fundamentally different than big banks?

A Regulatory Tsunami

While some of the changes affecting credit unions have been the result of gradual evolution, others were prompted by the events of 2008. The global crisis that shook the public’s faith in financial institutions spurred regulators to act—and the provincial credit union sector was not spared. B.C.’s Financial Institutions Commission (FICOM), the body responsible for overseeing and regulating provincial credit unions, has since issued guidelines requiring them to maintain higher capital reserves. “Basically FICOM wants a higher risk-safety margin: more capital, more liquidity, better loan indemnity criteria,” says Helmut Pastrick, chief economist of the Central 1 Credit Union, the trade association representing B.C. and Ontario credit unions.

So if it ever seemed that a credit union could function as a more lenient parent—dad says no, so go ask mom—FICOM guidelines are likely to close those opportunities down. “I’ve come across instances, particularly with commercial loans, where a bank has not issued credit and then that person has gone to a credit union and has received credit,” Pastrick says. “FICOM regulations will definitely tighten that up.”

Other FICOM guidelines have affected the makeup of credit union boards.

“The old model was the community-based board consisting of community leaders, members, local business people and volunteers. And by and large they did a great job,” says Rod Dewar, president and CEO of Island Savings Credit Union. But FICOM’s new model seeks a higher professional standard. “It requires a solid level of knowledge of risk,” Dewar says. “It’s led to credit union boards with more accountants and lawyers, and people with board experience in other businesses. Volunteers are being replaced with paid professionals.”

“Some have called it a regulatory tsunami,” says Chris Catliff, president and CEO of BlueShore Financial, which was known as North Shore Credit Union prior to a rebranding last September. “I’d call it a logical extension of the repair work that was made necessary by the financial crisis. It will take years of dedicated work to make sure these things don’t happen again.”

While it’s hard to imagine any financial institution applauding more government regulation, Catliff believes the industry is generally receptive. “It’s the same for credit unions or hockey,” Catliff says. “You don’t mind if the ref calls it tight just as long as it’s fair and consistent. FICOM does that. It doesn’t mean that credit unions love change. But it’s time to get with the program.”

Strictly speaking, B.C. credit union legislation has not changed since 2004—the legislation is due for a major review in 2014. What FICOM has been issuing are revised guidelines. “Legislation is not the most flexible way to deal with the financial sector,” says Carolyn Rogers, superintendent of financial institutions at FICOM. “It’s hard to keep up with changes in the industry. What legislation does is set the minimum requirements. We issue guidelines to keep industry standards connected to economic developments.”

Banking on Bank-like

Rogers says some of FICOM’s recent work has been as much about transparency as change. “FICOM has always had standards, but pre-2008 it was not our habit to make them public to credit unions and their members. We have been doing more to communicate how we supervise, what we expect, and how we expect management to conduct business.” That said, Rogers agrees that guidelines have been tightened. “We’ve definitely raised the bar,” she says.

She maintains, however, that if there’s any shift toward a banking model, it won’t be the result of regulation. “It’s up to the credit unions themselves,” Rogers says. “Credit unions are getting into more bank-like businesses, offering mezzanine financing, large-scale commercial lending, venture-capital lending.”

Along with tighter fiscal reins, credit unions can now look forward to potential new opportunities. The federal government’s Jobs and Economic Growth Act will allow credit unions to register nationally for the first time, opening branches across the country as they transfer from provincial to federal control. “It’s a good thing,” Catliff enthuses. “Credit unions have been asking for this for years but until now it hasn’t come to fruition. I think it’s inevitable that some will go federal. It’s a chance to diversify risk, and go farther afield—not something we’ll be considering in the next five years but as an option, fantastic.”

Going national would mean submitting to the same tight regulations that govern banks under the Office of the Superintendent of Financial Institutions (OSFI). But Dewar says credit unions are headed in that direction anyway. “Since 2008 FICOM regulations have become more bank-like,” says Dewar. “If any credit unions choose to make the move to federal registration they would likely have to move to a similar business model that would allow them to compete against banks more broadly.”

“OSFI has re-examined all of its regulations as a result of the financial crisis, as most other advanced economies have,” Pastrick says. “FICOM and, I presume, other provincial credit union regulatory agencies, are generally adopting OSFI’s regulations. You have to hold a certain amount of your assets as capital; you have to have a certain amount of liquidity. We’ve been in stress-testing mode for the past three or four years and that will continue.”

Local Money, Record Profits

It’s been a tough few years for the financial sector. But B.C. credit unions seem to have come through the recent stormy seas very well. According to FICOM figures, B.C. credit unions have experienced 4.8 per cent growth since last year, and the largest institutions, such as Vancity and Coast Capital, have enjoyed record profitability. Four of the country’s five biggest credit unions are in B.C., and with total assets of $58 billion, the B.C. credit union sector is surpassed only by that of Quebec. “We did have a record year last year and expect to do well again in 2013, despite the challenging economy,” says Bill Wellburn, chair of Coast Capital’s board of directors. “We have seen large growth in membership and reached a historic milestone of 504,000 members in 2012.”

The growth of B.C.’s credit union giants has been a story of mergers. Small may be beautiful, but in the financial sector it can also be dangerous. Although the spotlight may have fallen on large banks when the recession hit, Pastrick feels that due to their more localized bases it was credit unions that faced the bigger challenges. “A community credit union is geographically concentrated, unlike a large bank,” Pastrick says. “Should that area experience a downturn, the local credit union would as well. As would the local branch of a chartered bank, but that chartered bank is so large that it wouldn’t be affected much by a localized downturn.”

The Urge to Merge

The comparative disadvantages of being a little guy have inevitably led B.C. credit unions toward mergers. “There are 43 credit unions operating in B.C.,” says Pastrick. “In the early ’60s there were over 300. Many of them were small operations based in a particular business, and over the years they merged and grew.”

Pastrick points to the example of Vancity, which can trace its history to a lot of small credit unions: 54 of them to be exact. Vancity, founded in 1946, has merged with outfits including Greater Victoria Savings, the Teachers Credit Union and the former Van Tel credit union to become the largest credit union in English Canada by assets.

The story of Coast Capital is a similar story of mergers, in particular the 2000 marriage of Pacific Coast Savings and Richmond Savings. It then swallowed Surrey Metro Savings in 2002.

Island Savings is another example of the small getting bigger. It began 62 years ago as the Duncan and District Credit Union, later merging with several other credit unions and spreading out over Vancouver Island and Salt Spring Island. Currently the credit union is awaiting final approval of a merger with Langley-based First West. For Island Savings, the urge to merge has been driven by a weak economy. “Economic growth has been flat on the island,” Dewar says. “Since 2008 we’ve been looking at tighter margins. I think this is the new normal for the financial services industry—I don’t think it will bounce back very soon.”

The new entity created by a First West/Island Savings merger will have more options. “We want to control our own destiny,” Dewar says. “Organizations like ours are being pushed to increase their capital reserves. For a mid-tier credit union that wants to implement new sources of revenue there’s a long cycle time from idea to implementation. How best can we build? How do we offer new products and services? A merger with First West suits our needs… As for First West, they’re picking up a very valuable asset.”

Options for introducing new products and services are more limited and more costly for a smaller institution,” Pastrick says. “With the merger between First West and Island there will presumably be some gains in efficiency—they’ll probably be able to flatten their management structure somewhat. And by pooling resources they’ll be better able to launch new products.”

Mergers and growth have led to rebranding. In the case of BlueShore Financial, the former North Shore Credit Union outgrew its local roots. “The name just didn’t match the business anymore,” says Catliff. “Seventy-four per cent of our business is not on the North Shore.”

As credit unions have merged and expanded it’s inevitable that proud regional flag-waving has given way to more generic corporate identities. Edelweiss and Fraser Valley credit unions combined to become Prospera Credit Union in 2002; Ladner Fisherman’s Credit Union became Delta Credit Union, then merged with First Heritage to become Envision Financial, which then merged with Valley First to become First West Credit Union.

Coast to Coast

If mergers have been the typical means of growth within the province, creating a national organization would be a different and more ambitious approach. The enabling legislation, the federal Jobs and Economic Growth Act, passed in 2010, and specific guidelines for national credit union registration were released in December 2012.

No B.C. credit union has yet announced plans to go national, but there has been industry enthusiasm for the idea. David Phillips, president and CEO of Credit Union Central of Canada, the national trade association and central bank for Canadian credit unions, called the Jobs and Economic Growth Act “a major milestone in providing credit unions a new option to seek growth opportunities and enhance member service. We congratulate the federal government for taking this action.”

Coast Capital doesn’t rule out the possibility of going national. “The federal legislative framework, including legislation and regulations, is complex and it will take time before we have a full understanding of its impact,” says Wellburn. “However, based on an initial assessment of the federal credit union framework, we believe it provides a sound and comprehensive foundation for the establishment of federal credit unions.” Still, Wellburn cautions, the credit union would have to win the support of its members before pursuing national expansion.

Vancity, on the other hand, will not be going national anytime soon. “It’s not an urgent priority for us,” says Vancity corporate secretary Karen Hoffman. There’s a good reason for that. Opting for a completely different approach, Vancity created its own bank, setting up Citizen’s Bank in 1997 as a wholly owned subsidiary. “It’s not a retail bank in the traditional sense—there are no separate branches,” explains Hoffman. Through its bank, Vancity can offer foreign exchange services to small and medium-sized businesses across the country, and can also offer Visa cards.

While the essential factor distinguishing credit unions from banks is member ownership and control, there are other differences. A credit union cannot offer foreign exchange services, for example, and must deal with an outside supplier in order to offer credit cards. However, credit unions have some regulatory advantages over banks: for one, they’re allowed to sell insurance. As well, tougher new OSFI mortgage regulations introduced in 2012 do not affect provincially regulated credit unions. By going national, a credit union would lose those advantages.

Points of Differentiation

So are credit unions becoming banks? Catliff’s BlueShore Financial, for example, dropped “credit union” entirely in its rebranding. Catliff insists the difference between banks and credit unions is real and enduring. “The critical point of difference is that banks follow a profit-maximization model for the benefit of their shareholders,” he says. “Credit unions follow a model of maximizing services for their members. They re-invest to achieve greater levels of service for membership. The makeup of the credit union as a one-member, one-vote organization ensures democracy. Bank shareholders just focus on profit.”

Vancity’s Hoffman has a personal perspective on the dividing line between banks and credit unions. “I used to work at a large bank,” she says. “With every client transaction it was always necessary to ask, ‘What am I doing to increase shareholder value?’ So there was always tension between those two contrasting parties—the client and the shareholder. At Vancity we don’t have other stakeholders. If I’m doing something that doesn’t help members, I shouldn’t be doing it.”

“Hypothetically, could a credit union grow enough through multiple mergers to become the same kind of omnivorous financial institution?” BlueShore’s Catliff muses. “It could happen. But we’re nowhere close to it now.”